— The Gravity Model of International Trade - dubbed the ‘workhorse’ of international trade policy analysis - is put to the test to investigate the Caribbean Community’s (CARICOM’s) trade with external trading partners. In order to get a better understanding of the factors which have influence CARICOM’s trade with its ‘traditional’ trading partners, and the opportunities associated with increased trade with ‘non-traditional’ partners, it is important to understand the underlying factors which have impacted CARICOM’s external trading past. An augmented gravity equation is formulated to analyze both import and export data against the variables of the relative size of the pair of countries involved in trade, distance, exchange rate, common border, common language, common currencies, and preferential trading schemes. Three different estimation techniques, the Ordinary Least Squares (OLS), the Least Squares Dummy Variable (LSDV), and the Poisson-Pseudo Maximum Likelihood (PPML) Estimator Models, are utilized to compare the robustness of results. These models are tested on a sample of forty (40) of CARICOM’s top trading partners using data from 1980 to 2006. The results reveal that similar yet differentiated factors have impacted CARICOM’s import and export patterns over the years, and that participation in preferential trading schemes do not always result in trade creation.
— CARICOM, gravity model, ordinary least squares, least squares dummy variable, Poisson-pseudo maximum likelihood estimator, trade creation, trade diversion.
Lisandra Patrice Colley is with the Zhongnan University of Economics and Law in Wuhan City, Hubei Province, P.R.China (e-mail: email@example.com).
Cite: Lisandra Patrice Colley, " Gravity to CARICOM: An Analysis of CARICOM's External Trade Using an Augmented Gravity Model," Journal of Economics, Business and Management vol. 3, no. 12, pp. 1131-1137, 2015.