Assessing Fiji’s Global Trade Potential Using The Gravity Model Approach

Yenteshwar Ram and Biman Chand Prasad
Working Paper School of Economics University of The South Pacific, 2007

In this paper, we have attempted to estimate Fiji’s trade potential using the gravity model approach. We have used an augmented gravity model to first analyze world trade flows and the coefficients thus obtained are then used to predict trade potential for Fiji. The gravity model has been estimated using the OLS technique with cross-section data for the year 2005. The dependent variable in all our tests is total merchandise trade (exports plus imports in US dollars), in log form, between pairs of countries. Our estimation results show that the gravity equation fits the data well and delivers precise and plausible income and distance elasticities and estimates for other geographical, cultural and historical characteristics. The results indicate that the magnitude of Fiji’s trade potential is highest with the Asia-Pacific region followed by Western Europe and North America.

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