The Institutional Determinants of Bilateral Trade Patterns

Table 2

Basic Gravity Equations, dependent variable: log total bilateral export, home-to-foreign.

Note: * indicates statistical significance at 10% (two sided), ** at 5% *** at 1 %. Constant terms, where
applicable, are not shown in the table. Specifications 4 and 6 have been estimated with a full set of country
dummies.

In accordance to previous studies of bilateral trade using the gravity model, bilateral
trade is positively related to the size of domestic outputs. We focus on exports of individual
countries as they enter into bilateral trade relations, rather than on total bilateral trade for
each pair of countries. This specification of the model explicitly allows us to examine
whether the effect of GDP on trade differs for an exporter, compared to an importing
country. The results in Table 2 indicate that the elasticity of home-to-foreign export with
respect to foreign GDP is lower than the elasticity for GDP in the country of origin. This
implies that the effect of larger output on export exceeds the effect of output on import
demand. Moreover, the effect sizes indicate that export supply is elastic (reacts more than
proportionally) with respect to output, whereas import demand is inelastic. For example, in
specification 1, a 1% rise in exporter GDP raises its bilateral export on average with an
estimated 1.19%, while a similar rise in importer GDP yields an estimated 0.86% rise in
bilateral export. Subsequently we added geographical distance to the set of explanatory
variables, as a proxy for transportation costs. The results support the importance of the
costs of transport for trade. The further two countries are separated geographically, the less
they trade. Specifications that include the natural log of distance as an explanatory variable

Bilateral Trade Flows and Institutions

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