Abstract
The purpose of this paper is to analyze the impact of trade openness and the factors based on the gravity model on the bilateral trade flows between Thailand and Japan. The factors consist of GDP, distance, trade openness, and exchange rate. Bilateral trade is composed of two flows: Thailand’s export flow to Japan, and Thailand’s import flow from Japan. The specified gravity equations are estimated by Copula-based Markov switching seemingly unrelated regression approach. The best-fitting model is chosen based on the lowest Akaike information criterion (AIC) and Bayesian information criterion (BIC). The Normal and Student’s t distributions are for Thailand’s export equation and Thailand’s import equation, respectively. The Student’s t copula is applied for joint distribution. Analyzing the bilateral trade flow is separated into two situations, namely the high and the low growth markets. Empirical results show that distance provides a positive effect on the export in a high growth regime, but a negative impact on the export in a low growth regime. As for Thailand’s import flow, all variables, but especially trade openness, provide strong evidence supporting significance for both regimes. For the GDPs of both Thailand and Japan, trade openness and the exchange rate increase import flow in a high growth market. Meanwhile, the exchange rate decreases import flow in a low growth market. The Markov Switching Probability Estimation notes that Thailand’s trading with Japan is mostly in the fast-growing market.
Highlights
International trade in recent years has become one of the most important factors in developingThailand’s economy
International trade plays a crucial role in improving the economy of a country
It is stated that the export-led growth (ELG) hypothesis has been largely used in economic explanations by focusing on exports
Summary
International trade in recent years has become one of the most important factors in developingThailand’s economy. It is stated that the export-led growth (ELG) hypothesis has been largely used in economic explanations by focusing on exports. This is because export expansion leads to a better allocation of scarce resources and generation of economies of scale, while significantly contributing to economic growth. More currencies can be converted into capital to invest in machineries with more advanced technology, leading to lower production costs. This leads to higher exports and enhances economic growth (Bhagwati 1988)
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