Estimating The Factors Leading To Change In Trade Patterns (Dissertation Sample)

ESTIMATING THE FACTORS LEADING TO CHANGE IN TRADE PATTERNS BETWEEN BRAZIL AND CHINA USING THE GRAVITY MODEL
A thesis submitted to the capital University Economics and business for award of masters’ degree
NAME:
ID NO:
SCHOOL
MAJOR FIELD:
SUPERVISOR:
DATE:March 2017
DECLARATION
I declare that this thesis is my original work and to my knowledge has not been presented in any other university/institution for award of degree of academic qualification examination purposes.
Signature _________________________ date____________________
Name:
Reg no:
Supervisors’ declaration
This thesis has been submitted for presentation with our approval as university supervisors.
Signature _________________________ date____________________
Name
Signature _________________________ date____________________
Name
ACKNOWLEDGEMENT
I thank the Almighty God for providing all that I required and strength during the entire period of my studies. I wish to appreciate my supervisors………………………………. and Dr…………………………………for their guidance and advice through this thesis. My sincere gratitude goes to my family for their encouragement. I also appreciate my colleagues and friends for their support and contribution during the entire period of this thesis.
Thank you all and God bless.
ABSTRACT
With the changes that have occurred recently on the bilateral trade between Brazil and china, this research is based on empirical estimation of factors impacting bilateral trade between Brazil and china using the gravity econometric model. The facilitation of trade between countries has recently become a great area of debate in many forums for trade hence the empirical study on the issues of facilitating trade experiencing resurgence. This study therefore provides both theoretical and empirical analysis of factors influencing the fluctuations in trade inflows between Brazil and china. The flows of imports and exports for the two counties have been examined using the gravity framework. Throughout the research the income which is measured by the gross domestic product was expected to have a positive impact on the trade flow, the distance between the two countries was expected to have a negative impact on trade since it shows the transportation cost between Brazil and china. The population of the two countries was also expected to have a positive impact on trade. A detailed introduction has been provided in the background of the study. The definitions, importance and factors affecting trade have been discussed. The development of trade and the gravity model have been outlined to help in understanding the origin of the gravity model and how it came to be applied in economics of international trade. The literature review has provided an important summary of the previous research done in the same field of research and provided which areas there is spaces which may form a basis for further analysis. The study uses exports data for the two countries from January 2000 to December 2015 a span of 10 years. The data was analyzed using the R for windows version 3.3.0 statistical software for analysis of data. The ordinary least square regression method was used to estimate the parameters of the gravity model equation. In this study the log linear equation was used to fit the data. The steps of the fitting the model were employed and parameters estimated. As expected, the population of both countries had a positive impact on volumes of trade flow. The coefficient of the population of exporting country i.e. Brazil was 3.01 and that of country importing that is china was 0.96, implying positive significant impact on trade flows. The distance between the two countries also had a significant negative impact on the trade between the two countries. Distance had a large value of -2.78 as the coefficient which implies a large impact on trade flows. The GDP of the importing country had a significant positive impact on volumes of trade while the GDP of the exporting also had a significant impact on the trade volumes. The coefficient for the GDP of the importing country was 0.21 and that of the exporting country was -0.23. This study measured the three key factors that affect trade volumes between countries. Additional factors like language, inflation, and trading agreements between countries have been theoretically explained through the previous literature on international trade empirical estimation using the gravity model. Since this study only considered the three factors, it has recommended that further prospects be done on other factors influencing trade. There have been also emerging issues as recent as 2014 which may affect the volumes of trade like terrorism which has led to increased insecurity.
Keywords: Gravity, Trade, Gross Domestic Product, Distance, Population
TABLE OF CONTENTS TOC \o "1-3" \h \z \u DECLARATION PAGEREF _Toc476452273 \h 2ACKNOWLEDGEMENT PAGEREF _Toc476452274 \h 3ABSTRACT PAGEREF _Toc476452275 \h 4LIST OF ABBREVIATIONS PAGEREF _Toc476452276 \h 71.0: Background of the Study PAGEREF _Toc476452277 \h 81.2: Justification of the study PAGEREF _Toc476452278 \h 111.3: Objectives of the study PAGEREF _Toc476452279 \h 111.3.1: Main objective PAGEREF _Toc476452280 \h 111.4: General Introduction of the Gravity Model used in This Study PAGEREF _Toc476452281 \h 12CHAPTER TWO: LITERATURE REVIEW PAGEREF _Toc476452282 \h 142.0 Introduction PAGEREF _Toc476452283 \h 142.1 The Gravity Model PAGEREF _Toc476452284 \h 142.2: Literature Review PAGEREF _Toc476452285 \h 15CHAPTER THREE: THEORETICAL ANALYSIS PAGEREF _Toc476452286 \h 183.0: Introduction PAGEREF _Toc476452287 \h 183.1: The form of the gravity model and equation PAGEREF _Toc476452288 \h 183.2: Additional variables PAGEREF _Toc476452289 \h 193.3: The impact of income on trade PAGEREF _Toc476452290 \h 203.4: The impact of distance (transportation costs) on trade PAGEREF _Toc476452291 \h 20CHAPTER FOUR: EMPIRICAL TEST PAGEREF _Toc476452292 \h 214.0: Model Specification and Data Source PAGEREF _Toc476452293 \h 214.1: The gravity model equation PAGEREF _Toc476452294 \h 214.1: The variables PAGEREF _Toc476452295 \h 224.2: Empirical Results PAGEREF _Toc476452296 \h 224.3: Test for Heteroscedasticity PAGEREF _Toc476452297 \h 25CHAPTER FIVE: CONCLUSIONS AND PROSPECTS PAGEREF _Toc476452298 \h 265.0: Conclusions PAGEREF _Toc476452299 \h 265.1: Prospects for future development PAGEREF _Toc476452300 \h 26References PAGEREF _Toc476452301 \h 27
LIST OF ABBREVIATIONS
EUEuropean Union
GDPGross Domestic Product
OLSOrdinary Least Squares
WTO World Trade Organization
CHAPTER ONE: INTRODUCTION
1.0: Background of the Study
Trade is the basic economic concept involving the buying and selling of goods and services, with the compensation paid by a buyer to a seller or exchange of goods and services between parties. In trade the most common medium of exchange is money but the exchange may also involve goods and services by the parties involved which are referred to as barter trade. Trade, generally brings many benefits to countries and the citizens of that particular country. Raising the productivity of the countries involved, it has also enhanced the spread of innovative technology and knowledge. These benefits have lad to countries entering in to treaties to facilitate the trade between them, which has led to the bilateral trade reducing tariffs and improving border governance.
The trade between Brazil and china started long ago with Brazil exporting raw materials to china which has helped to promote industrialization in China. However in the recent years the amount of trade flows has gone down. Close to 18% of Brazil's imports came from China in 2015, while 18.6% of its exports being exported. But only 2.8% of China's imports came from Brazil and only 1.2% of the exports going to Brazil. There was a significant drop of the value of Brazil exports to china by a large amount of about$ 46b in 2013 to around $ 35b in 2015. There have been recoveries in the first half of 2016 but this is not a good sign owing to the benefits of international trade highlighted in the beginning of the introduction. In two years, Brazil had lost close to $51 billion even when they had shipped around 15 % more volume or products. The other channel of transmission of the Chinese slowdown comes through fiscal revenue as government tax revenue declined because of lower exports and lower profits. In turn, government spending was constrained by this slower revenue."
Trade changes with time hence it is one of the most dynamic economic activities especially among countries. Policies placed by nations for trade change every time due to the changing needs of the constituencies and also changing to accommodate change in future needs of the countries. The nations have to meet the needs of the population which are changing and also the fast population growth. The change in demographic factors of a country is a big contribution to the changing needs hence nations have to accommodate the changes. So due these reasons all and any activities contributing to international trade among countries and therefore makes the studies and research on such activities and factors very dynamic.
In economics the study of the best ways of distribution the resources which are scarce to benefit the nations are done. This makes economic a very dynamic science, the dynamicity is seen in the way it views the activities of international trade and the examination of such activities and the results obtained by such studies.. The needs of country’s populations are not always static hence the advantages of international trade provide a way of the country to address the changing needs. Employment of the advant...