Employing Gravity Model to Measure International Trade Potential

Abstract

Starting from the analogy of gravitational forces to explain the volume of bilateral trade, the Gravity model has become a very popular model in international trade research. The Gravity Model has also been widely developed by adding various independent variables. Instead to measuring trading volume and various factors that influence the volume of trade, there is not much utilization of the gravity model to measure trade potential. This research is intended to implement a gravity model to measure the potential of Indonesian fruit trade. The measurement of trade potential is carried out by using data on the three main group of Indonesian exported fruits (based on 6 digits HS Code) which traded in 16 years. The classical gravity model, employed in this research contains independent variables, such as the amount of tariffs, the existence of free trade agreements, population, GNP of each country, distance and share of trade. The method of analysis used refers to the gravity model applied by Susanto, et al (2007) and regression analysis method applied by Arita et al (2014). Since its easily fits with some important stylized facts, it is easy to use real data, and also easily estimates using Ordinary Least Square (OLS), the Gravity Model can be a comprehensive instrument for managing big data to present rapid and dynamic estimates of international trade in line with the demands of the Revolution Industry 4.0.