Fatima Olanike Kareem
Global State of Young Scientists
Global Young Academy
Halle (Salle)
Olayinka Idowu Kareem
Trade and Development Policy Research Network
International trade provides a channel with which the interaction, integration and partnership of countries can be attained and/or established. Despite the relevance of trade to national, regional and global economies, the documentation of these economic activities is sometimes inadequate such that it brings to question the validity of the generated data. Empirical scholars often find it difficult to analyze trade statistics with zero-trade values, especially in terms of finding natural logarithm. Researchers often deal with the zero trade statistics by employing the truncation method or censoring method. However, this has consequences for empirical analysis and policy formulation because there is information in the zero-value trade that will be lost if they are truncated from the dataset. Hence, the main challenge in the literature is the issue of the most appropriate and efficient empirical strategy for solving the problem of zero-trade values among available options. This has led to controversy in the literature with several proofs and reproofs, actions and reaction as well as counter-reaction. It is on this basis that this paper is situated to review the raging controversy on the solution to the consideration of zero values in trade statistics as applicable to positive trade analysis and/or modelling.
[1] Flowerdew, R., Aitkin, M. “A method of fitting the gravity model based on the Poisson Distribution”. Journal of Regional Science, 1982, 22: 191-202.
[2] Eichengreen, B., Irwin, D. A. “The role of history in bilateral trade flows”, in: Jeffrey A. Frankel, (eds.).The Regionalization of the World Economy, 1998: 33-62.
[3] Linders, G.J.M., de Groot, H.L.F. “Estimation of the gravity equation in the presence of zero flows”, Tinbergen Institute Discussion Paper, 2006, No. 06-072/3.
[4] Burger, M., van Oort, F., Linders, G.J. “On the specification of the gravity model of trade: zeros, excess zeros and zero-inflated estimation”, Spatial Economic Analysis, 2009, 4 (2): 167-90.
[5] Heckman, J. “Sample selection bias as a specification error”, Econometrica, 1979, 47: 153-161.
[6] Helpman, E., Melitz, M., Rubinstein, Y. “Estimating trade flows: trading partners and trading volume”, Quarterly Journal of Economics. 2008, 123(2): 441–487.
[7] Head, K. and Mayer, T. “Gravity equations: workhorse, toolkit, and cookbook”, Sciences Po Economics Discussion Papers, 2013-02.
[8] Baldwin, R., Taglioni, D. “Trade effects of the euro: a comparison of estimators”, Journal of Economic Integration, 2007, 22 (4): 780–818.
[9] Fugazza, M. “The economics behind non-tariff measures: theoretical insights and empirical evidence”, Policy Issues in International Trade and Commodities Study Series No. 57, 2013.
[10] Evenett, S.J., Keller, W. “On theories explaining the success of the gravity equation”, NBER Working Paper No. 6529, 1998.
[11] Chaney, T. “The gravity equation in international trade: an explanation”. 2014, http://www8.gsb.columbia.edu/programs-admissions/sites/programs-admissions/files/finance/Macro%20Workshop/spring%202014/Thomas%20Chaney.pdf
[12] Zipf, G.K. “The P1P2/D hypothesis: on the inter-city movement of persons. American Sociology Review, 1946, 11: 677–686.
[13] De Benedictis, L., Taglioni, D. “The gravity model in international trade”, in: De Benedictis, L., Salvatici, L. (Eds.). Springer, Ch, “The Trade Impact of European Union Preferential Policies: An Analysis Through Gravity Models”. 2011, 4: 55–90.
[14] Tinbergen, J. “Shaping the world economy: suggestions for an international economic policy, New York: The Twentieth Century Funds.1962.
[15] Martinez-Zarzoso, I. “The log of gravity revisited”, Applied Economics. 2013, 45(3).
[16] Santos Silva, J.M.C., Tenreyro, S. “The log of gravity”, The Review of Economics and Statistics. 2006, 88: 641-658.
[17] Demaria, F., Rau, M-L., Schlüter, S.W. “NTMs and gravity-type models: state of the art and analysis of literature”. NTM-Impact Working Paper, 2011, 11/01.
[18] Manning, W., Mullay, J. “Estimating log models: to transform or not to transform?”. Journal of Health Economics, 2001, 20(4): 461–494.
[19] Frankel, J., Wei, S. “Trade blocs and currency blocs”, NBER Working Paper no. 4335, 1993.
[20] Anderson, J.E., Marcouiller, D. “Insecurity and the pattern of trade: An empirical investigation”. Review of Economics and Statistics, 2002, 84 (2): 342–352.
[21] Martin, W., Pham, C.S. “Estimating the gravity model when zero trade flows are frequent. World Bank manuscript, 2008. http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2008_03eco.pdf
[22] Rose, A.K. “Do we really know that the WTO increases trade?”, American Economic Review, 2004, 94(1): 98–114.
[23] Staub, K.E., Winkelmann, R. “Consistent estimation of zero‐inflated count models”. Health Economics, 2013, 22(6): 673-686.
[24] Gomez-Herrera, E. “Comparing alternative method to estimate gravity models of bilateral trade”. Empirical Economics, 2013, 44(3): 1087-1111.
[25] Tobin, J. “Estimation of relationships for limited dependent variables. Econometrica, 1958, 26(1): 24–36.
[26] Baldwin, R., DiNino, V. “Euros and zeros: the common currency effect on trade in new goods”. Center for economic Policy Research Discussion Papers No 5973, 2006.
[27] Santos Silva, J.M.C., Tenreyro, S. “Trading partners and trading volumes: implementing the Helpman-Melitz-Rubinstein Model Empirically”. CEP Discussion Paper No.935, 2009.
[28] Flam, H., Nordstrom, H. “Gravity estimation of the intensive and extensive margin: an alternative procedure and atlernative data, CESifo Working Paper No.3387, 2011.
[29] Santos Silva J.M.C., Tenreyro, S. “Trading partners and trading volume: implementing the Helpman Melitz-Rubinstein model empirically”. CEPR Discussion Papers 0935, 2008.
[30] Helpman, E., Krugman, P. Market structure and foreign trade: increasing returns, imperfect competition, and the international economy. 1985.
[31] Melitz, M.J. “North, South and distance in the gravity equation”, European Economics Review, 2007, 51: 971-991.
[32] Anderson, J.E., van Wincoop, E. “Trade costs”, Journal of Economic Literature, 2004, 17: 691-751.
[33] Bernard, A.B., Jonathan, E.J., Bradford, J., Kortum, S. “Plants and productivity in international trade”. American Economic Review, 2003, 93: 1268–1290.
[34] Mayer, T., Ottaviano, G. “The happy few: the internationalisation of European firms". Intereconomics: Review of European Economic Policy, 2008, 43(3):135-148.
[35] Novy, D. "International trade without CES: estimating translog gravity". CEP Discussion Papers dp1031, 2011.
[36] Novy, D. “International trade without CES: estimating translog gravity”, Journal of International Economics, 2012, 89(2): 271-82. URL http://www.sciencedirect.com/science/article/pii/S0022199612001584?v=s5
[37] Chen, N., Novy, D. “Gravity, trade integration and heterogeneity across Industries”. Journal of International Economics, 2011, 85(2): 206-221.
[38] Chaney, T. “Distorted gravity: the intensive and extensive margins of international trade". American Economic Review, 2008, 98: 1707-21.
[39] Anderson, J.E. “A theoretical foundation for the gravity equation’’. American Economic Review, 1979, 69: 106-116.
[40] Bergstrand, J.H. “The gravity equation in international trade: some microeconomic foundations and empirical evidence”, Review of Economics and Statistics, 1985, 67(3): 474–81.
[41] Bergstrand, J.H. “The generalized gravity equation, monopolistic competition, and the factor proportions theory in international trade”. Review of Economics and Statistics, 1989, 71(1): 143– 53.
[42] McCallum, J. “National borders matter: Canada-U.S. regional trade patterns", American Economic Review, 1995, 85(3): 615-623.
[43] Deardorff, A. “Determinants of bilateral trade: does gravity work in a neoclassical world?” in: Frankel, J.A. (eds.). The Regionalization of the World Economy, 1998, Chapter 1.
[44] Carrere, C. “Revisiting the effects of regional trade agreements on trade flow with proper specification of the gravity model”. European Economic Review, 2006, 50(2): 223-247.
[45] Egger, P. “A note on the proper econometric specification of the gravity equation”. Economics Letters, 2000, 66: 25–31.
[46] Rose, J., Van Wincoop, E. “National money as a barrier to international trade: The real case for currency union”. American Economic Review, 2001, 91(2): 386–390.
[47] Baltagi, B.H. "Recent developments in the econometrics of panel data”. Books, Edward Elgar Publishing, 2002, 0, (2701).
[48] Egger P, Pfaffermayr, M. “The proper panel econometric specification of the gravity equation: a three-way model with bilateral interaction effects”. Empirical Economics, 2003, 28: 571-580.
[49] Egger P, and Pfaffermayr, M. “Distance, trade and FDI: a SUR Hausman-Taylor approach”. Journal of Applied Economics, 2004, 19: 227-246.
[50] Melitz, M.J. “The impact of trade on intra-industry reallocations and aggregate industry productivity”. Econometrica, 2003, 71: 1695-1725.
[51] Baltagi, B.H. “Econometric analysis of panel Data”. John Wiley & Sons, 2008, 4th edition.
[52] Gomez-Herrera, E. “Comparing alternative method to estimate gravity models of bilateral trade”. Empirical Economics, 2013, 44(3): 1087-1111.
[53] Xiong, B. and Beghin, J.C. “Aflatoxin redux: does European aflatoxin regulation hurt groundnut exporters from Africa?. European Review of Agricultural Economics, 2011.
[54] Rose, A.K. “One money one market: estimating the effect of common currencies on trade”. Economic Policy, 2000, 15: 7–46.
[55] Frankel, J.A. “Regional trading blocs in the World Economic System”. 1997.
[56] Eaton, J. and Tamura, A. "Bilateralism and regionalism in Japanese and U.S. trade and direct foreign investment patterns". Journal of the Japanese and International Economies, 1994, 8: 478-510.
[57] Santos-Silva, J. and Tenreyro, S. “Further simulation evidence on the performance of the Poisson-PML estimator”. Economics Letters, (2011), 112(2): 220–222.
[58] Martinez-Zarzoso, I., Nowak-Lehman, D., Vollmer, S. “The log of gravity revisited”, CeGE Discussion Paper 64, 2007.
[59] Turkson, F.E. “Logistics and bilateral exports in developing countries: a multiplicative form estimation of the logistics augmented gravity equation”. Discussion Papers 11/06, 2010.
[60] Sören, P. and Bruemmer, B. “Bimodality and the performance of PPML”, Institute for Agriceconomics Discussion paper 1202, Georg-August Universität Göttingen, Germany, 2012.
[61] Johnson, N., Kotz, S., “Distributions in statistics – discrete distributions”, John Wiley and Sons, New York, 1969.
[62] Munasib, A. and Roy, D. "Sanitary and phytosanitary standards as bridge to cross", IFPRI discussion papers 1140, International Food Policy Research Institute (IFPRI), 2011.
[63] Shepotylo, O. “Gravity with zeros: estimating trade potential of CIS countries”, Kyiv School of Economics Discussion Papers 16, 2009.
[64] Haq, Z., Meilke, K. and Cranfield, J. “Does the gravity model suffer from selection bias? Canadian Agricultural Trade Policy Research Network Working Paper No 90884, 2010.
[65] Bouet, A., Mishra, S. and Roy, D. Does Africa trade less than it should, and if so, why? the role of market access and domestic factors. International Food Policy Research Discussion Paper No 770, 2008.
[66] Haworth, J.M. and Vincent, P.J. “The stochastic disturbance specification and its implications for log-linear regression”, Environment and Planning A, 1979, 11: 781-90.
Copyright © 2019 Olayinka Idowu Kareem, Fatima Olanike Kareem
This is an open access article under the Creative Commons Attribution-NonCommercial 4.0 International (CC BY-NC 4.0) License.
