Pakistan’s Trade Insight in Terms of Gravity Model: An Empirical Evidence

Abstract

This study is intended to analyze the determinants of the trade potential of Pakistan. For the said purpose, the study employed an augmented gravity model over the data of 12 trading partner countries of Pakistan for the period of 20 years from 2002 to 2022. The dependent variable is merchandise trade, while the independent variables consist of core variables i.e., GDP & bilateral distance, and explanatory variables like population, common border, and preferential trade agreement. Breusch-Pegan and Hausman's tests were used for model selection, which proposes that the Random effect model is appropriate for estimation. The results confirm that distance among trading states hurts trade between them. Although the GDP of Pakistan shows a positive effect on trade the relation is inconsequential. However, the impact of GDP on trading associates of Pakistan is positive and highly substantial. The population of trading allies of Pakistan is showing a significant positive impact on trade. Common border and preferential trade agreements between the trading partners have a significant negative influence on trade. The study concludes that for Pakistan, the larger the distance with its trading associate country the smaller the trade among them and Pakistan has greater trading potential with larger economies as compared to smaller ones.