Thesis
nathan fabius
March 5, 2018
The origins of Economics can be closely related to the International Trade, as such David Ricardo a British Economist in the XVIII century devoted a big part of its academic production focusing on the isssue of trade, and specifically comparative advantange. However,even if commercial flows paid such a central role in economics it would be only in 1962 that Jan Tinbergen would come up with an empirical model that would predict the volume of flows betweeen two countries. The Dutch economist came up with a model borrowed from physics originally developed by Isaac Newton. The application known as the Gravitational Trade model can be seen below:
\[T_{US,Other} = G_{US,Other} \frac{(GDP_{US})^\beta(GDP_{other})^\gamma}{(Dist_{US,Other})^\zeta}\] Where:
\(T_{US,Other}\) :trade volumes between the United States and other countries. \(G_{US,Other}\) :A constant refered by the letter G that affects the size of trade between the pair of countries.\((GDP_{US})^\beta(GDP_{other})^\gamma\): the product of the Gross Domestic Product of both Countries.\((Dist_{US,Other})^\zeta\):The distance between the pair of countries.
The simplicity of the model and its explanatory power made it really atractive but one of the major critics it attracted were due to the fact that in its original form it lacked any type of formal economic foundation. It would take till 1979 when Anderson developed a Gravity model based on formal economic assumptions. In order to do so the author assumed that every country produced a unique imperfectly substitutable product and identical preferences across countries. At the moment this asumptions were seen as arbitrarely, but it still managed to provide the first theoretical foundations that connected GDP size to GDP per capita to the share of tradable goods in an economy a crucial factor for trade.\(^1\)
In 1985 Bergstrand further expanded the microeconomic foundations by allowing for different preferences among countries and different prices between products that were produced and consumed locally and the ones that were exported. However, this new model had limited empirical applications as price indexes need to have a base year for comparisson, which is suitable for time series but has limited applications for panel data analysis. \(^2\)
In 2001 Anderson and Van Wincoop developed a new model that could better incorporate both relative prices and different preferences thus solving part of the critiques to the Gravitational Trade model. Published in 2003, “Gravity with Gravitas: A Solution to the Border Puzzle”, provided a sound framework that would be explained using Baldwin & Taglioni (2006) paper.
\(^1\) : Taglioni & Anderson \(^2\) : Bergstrand, Gravity sruvey pag.18
Trade Missing Values
Trade data refers as Imported by the United States and exported by the US to other countries.
| Year | Freq |
|---|---|
| 1962 | 7 |
| 1963 | 7 |
| 1964 | 7 |
| 1965 | 7 |
| 1966 | 5 |
| 1967 | 4 |
| 1968 | 4 |
| 1969 | 4 |
| 1970 | 3 |
| 1971 | 2 |
| iso3c | Name | Freq |
|---|---|---|
| MWI | Malawi | 4 |
| ZWE | Zimbabwe | 4 |
| FJI | Fiji | 5 |
| BLZ | Belize | 8 |
| RWA | Rwanda | 9 |
| ARE | United Arab Emirates | 10 |
| BGD | Bangladesh | 10 |
Malawi(MWI) gained independence in 1964, therefore only has trade data starting in 1966. Zimbawe(ZWE) gained independence in 1964, therefore only has trade data starting in 1966. Fiji(FJI) Missing data 1962-1966 not clear why. Equatorial Guinea(GNQ) several years missing, changed to 0 as it broke relations with the West in 1972. Belize(BLZ) Missing data 1962-1969 not clear why. Rwanda(RWA) Missing data 1962-1970 not clear why. United arab emirtates(ARE) missing data 1966-1971 year in which it gained independence. Bangladesh(BGD) missing data 1966-1971 year in which it gained independence.
| cluster | 0 obs missing | 1 obs missing | 2 obs missing | 3 obs missing | 4 obs missing | 5 obs missing | 6 obs missing |
|---|---|---|---|---|---|---|---|
| 1 | 0.00 | 0.70 | 37.90 | 31.70 | 12.40 | 5.50 | 11.70 |
| 2 | 24.12 | 13.78 | 11.43 | 11.55 | 13.17 | 12.20 | 13.74 |
| 3 | 84.37 | 6.15 | 3.47 | 1.95 | 1.66 | 1.16 | 1.29 |
| 4 | 10.80 | 5.97 | 5.07 | 4.40 | 6.00 | 22.07 | 45.77 |
| 5 | 52.81 | 15.58 | 9.45 | 7.30 | 5.31 | 4.86 | 4.67 |
| cluster | 1974 | 1975 | 1976 | 1977 | 1978 | 1979 |
|---|---|---|---|---|---|---|
| 1 | 100.00 | 99.31 | 37.93 | 33.10 | 33.79 | 15.17 |
| 2 | 58.79 | 43.68 | 38.39 | 40.29 | 43.97 | 42.18 |
| 3 | 7.31 | 7.03 | 6.34 | 5.84 | 5.70 | 6.71 |
| 4 | 79.77 | 72.18 | 71.26 | 68.97 | 74.25 | 71.49 |
| 5 | 27.46 | 23.16 | 20.32 | 20.16 | 19.80 | 19.07 |
Among the 5 clusters we can identify two main categories, Cluster 1 is compossed of Tags that contain all countries and are almost complete for all years. Cluster 2 is composed of Tags that are present almost completetly among all countries but not as widespread as in the case of Cluster 1, also the lack of presence over the years is constant around 20% of countries. Cluster 3 is compossed of TAG 33( U.S. Overseas Direct Employment Program) alone, this TAG will be dropped as it is not constant over the years just starting to be used in 1975. Cluster 4 is composed of TAGS that have constant use across time but vary across countries with just 25% of the countries being present completetly. Finally, cluster 5 is the opposite from Cluster 1, is composed of TAGS were for some countries there are compelte observation but the norm is that for the majority there are no observations at all. This seems to be a TAGS that deal with specific issues not common among all countries.
Tags U.S. Overseas Direct Employment Program(33), International Labor Organization(216), Business-Commercial Publications and Libraries (57), Business Services Reports(50), UN Conference on Trade and Development (273) will be dropped because they do not have consistent appearence along the years. In some cases there does not seems to be a clear cause for this other than probably changing patterns of use. For ILO, and UNCTAD this change is due to the fact that theh US left the ILO in 1977 and there were two UNCTAD conferences in 1976 and 1979 respectively. Therefore as this issues affect the TAGS they were dropped.
Overlapping on TAGS and Documents
| Title | TAG.id | Freq |
|---|---|---|
| Economic Alert List Reporting | 71 | 1 |
| General Agreement of Tariffs and Trade | 190 | 1 |
| International Bank for Reconstruction and Development | 200 | 1 |
| Export-Import Bank of the United States | 312 | 1 |
| Organization for Economic Cooperation and Development | 255 | 6 |
| Chemical Industry and Chemical Products | 72 | 9 |
| East-West Trade | 78 | 14 |
| Economic Integration and Collaboration | 73 | 17 |
| Coordinating Committee on Export Controls | 169 | 20 |
| Science Grants | 108 | 40 |
| National Development | 113 | 65 |
| Plant, Animal, and Wood Products | 88 | 105 |
| Strategic Trade Controls | 90 | 159 |
| Commerce, Industry, and Industrial Products | 82 | 174 |
| Budget Services and Financial Systems | 15 | 179 |
| Metals and Minerals | 86 | 188 |
| Waterborne Transportation | 94 | 201 |
| Economic Conditions, Trends, and Potential | 74 | 211 |
| Trade and Investment Opportunities | 58 | 222 |
| Trade Complaints and Disputes | 51 | 248 |
| Technology and Science – General | 140 | 321 |
| Investments | 83 | 365 |
| Military Assistance and Sales | 97 | 393 |
| Fishing | 80 | 427 |
| Financial Services | 568 | 435 |
| Technology | 139 | 448 |
| Environment | 128 | 485 |
| Economics – General | 81 | 567 |
| Agriculture and Forestry | 68 | 715 |
| Business Services – General | 55 | 825 |
| Foreign Assistance | 69 | 1109 |
| Travel by U.S. and Foreign Businessmen | 59 | 1289 |
| Financial and Monetary Affairs | 79 | 1463 |
| Foreign Trade | 92 | 1790 |
| Property Protection Services | 66 | 1878 |
| Trade Expansion and Promotion | 53 | 2621 |
| Business Proposals and Inquiries | 56 | 3302 |
| Consular Affairs – General | 64 | 9787 |
A Cable(comunication between two entities of the State deparment), could have attached more than one TAG. TAGS can be seen as Hashtags attached to a post on social media, the post which is the message can have 0 or more hastags. The more TAGS a message has the more topics been discussed in the Cable. The table above shows cables that have one TAG meaning that when they were classified they only deal with the topic of the TAG, this selection was done among all TAGS and not only the ones pertraning this study. As a rule of tumb we will drop all Tags that have less than 321 observations of cables were they are the only TAG. This criteria is based on the fact that the dataset has 6-7 years and 145 countries meaning that having at least one cable per year for each country would represent 870 calbes therefore close to half of it seems to be a reasonable benchmark after reviewing the frequency on the table above.
From the dropped cables I will keep the ones with at least 100 cables were they are the unique cables, as they could be referring to specific topics that only refer to a limited number of countries.
Also Asian Development Bank(45), International Monetary Fund(219), Overseas Private Investment Corporation(257), Canal Zone(378) do not appear on the table above as they have no unique cable were their TAG is the only one.
Above all this needs to be done in order to prevent an issue of multicollinearity among the cables, as if all cables of one specific TAG are shared with other Tags this would amount to a linear combination of the other TAGS. Therefore behind the the rationale of dropping TAGS with the less number of distinct tables lies the idea that these TAGS represent less unique topics that are reflected or comprehended inside the other more “unique” TAGS.
First regression log of avg (exp + imp)
##
## ================================================================================================
## Model 1 Model 2 Model 3 Model 4 Model 5
## ------------------------------------------------------------------------------------------------
## Dummy for diplomatic relations 7.93 *** 7.92 *** 7.93 *** 7.93 *** 7.92 ***
## (0.24) (0.24) (0.24) (0.24) (0.24)
## log of population -0.17 *** -0.16 *** -0.14 *** -0.17 *** -0.15 ***
## (0.04) (0.04) (0.04) (0.04) (0.04)
## log of Area sq Km -0.09 *** -0.10 *** -0.10 *** -0.10 *** -0.10 ***
## (0.02) (0.02) (0.02) (0.02) (0.02)
## Log of distance -0.80 *** -0.81 *** -0.82 *** -0.83 *** -0.79 ***
## (0.09) (0.09) (0.09) (0.09) (0.09)
## log of GDP 1.07 *** 1.06 *** 1.05 *** 1.08 *** 1.07 ***
## (0.03) (0.03) (0.04) (0.03) (0.03)
## % of common religion 1.13 *** 1.10 *** 1.34 *** 1.26 *** 1.16 ***
## (0.32) (0.32) (0.34) (0.33) (0.32)
## Dummy for Common language 0.43 *** 0.46 *** 0.47 *** 0.46 *** 0.45 ***
## (0.08) (0.08) (0.08) (0.08) (0.08)
## Tag Investments 1.45 *** 1.32 *** 1.40 *** 1.27 *** 1.45 ***
## (0.31) (0.34) (0.31) (0.33) (0.31)
## Tag Trade expansion 1.51 *** 1.53 *** 1.58 *** 1.58 *** 1.53 ***
## (0.38) (0.38) (0.38) (0.38) (0.38)
## Tag Trade controls -1.16 *** -1.14 *** -1.07 *** -1.12 *** -1.15 ***
## (0.15) (0.15) (0.14) (0.14) (0.15)
## Tag animals,plants & wood prods 0.62 **
## (0.22)
## Tag Financial Affairs 0.74
## (0.43)
## Tag Arm sales 0.66 *
## (0.26)
## Foreign Assistance 0.93 *
## (0.39)
## Bussiness Proposals 0.47 *
## (0.20)
## ------------------------------------------------------------------------------------------------
## R^2 0.83 0.83 0.83 0.83 0.83
## Adj. R^2 0.83 0.83 0.83 0.83 0.83
## Num. obs. 1015 1015 1015 1015 1015
## ================================================================================================
## *** p < 0.001, ** p < 0.01, * p < 0.05
First regression avg of (log imp + log exp)
##
## ================================================================================================
## Model 1 Model 2 Model 3 Model 4 Model 5
## ------------------------------------------------------------------------------------------------
## Dummy for diplomatic relations 7.90 *** 7.88 *** 7.89 *** 7.90 *** 7.88 ***
## (0.32) (0.33) (0.33) (0.33) (0.33)
## log of population -0.12 * -0.10 -0.08 -0.11 -0.09
## (0.05) (0.05) (0.05) (0.06) (0.05)
## log of Area sq Km -0.16 *** -0.16 *** -0.17 *** -0.16 *** -0.17 ***
## (0.03) (0.03) (0.03) (0.03) (0.03)
## Log of distance -0.72 *** -0.74 *** -0.75 *** -0.75 *** -0.72 ***
## (0.12) (0.12) (0.12) (0.12) (0.12)
## log of GDP 1.18 *** 1.17 *** 1.16 *** 1.19 *** 1.17 ***
## (0.05) (0.05) (0.05) (0.05) (0.05)
## % of common religion 2.81 *** 2.78 *** 3.01 *** 2.89 *** 2.84 ***
## (0.44) (0.44) (0.46) (0.45) (0.44)
## Dummy for Common language 0.55 *** 0.58 *** 0.59 *** 0.58 *** 0.57 ***
## (0.11) (0.11) (0.11) (0.11) (0.11)
## Tag Investments 1.60 *** 1.45 ** 1.59 *** 1.55 *** 1.63 ***
## (0.42) (0.46) (0.43) (0.45) (0.42)
## Tag Trade expansion 1.65 ** 1.68 ** 1.75 *** 1.77 *** 1.72 ***
## (0.52) (0.52) (0.52) (0.52) (0.52)
## Tag Trade controls -1.51 *** -1.50 *** -1.42 *** -1.45 *** -1.48 ***
## (0.20) (0.20) (0.20) (0.20) (0.20)
## Tag animals,plants & wood prods 0.72 *
## (0.30)
## Tag Financial Affairs 0.87
## (0.58)
## Tag Arm sales 0.60
## (0.36)
## Foreign Assistance 0.56
## (0.53)
## Bussiness Proposals 0.41
## (0.27)
## ------------------------------------------------------------------------------------------------
## R^2 0.76 0.76 0.76 0.76 0.76
## Adj. R^2 0.76 0.76 0.76 0.76 0.76
## Num. obs. 1015 1015 1015 1015 1015
## ================================================================================================
## *** p < 0.001, ** p < 0.01, * p < 0.05First regression log of exp
##
## ================================================================================================
## Model 1 Model 2 Model 3 Model 4 Model 5
## ------------------------------------------------------------------------------------------------
## Dummy for diplomatic relations 8.06 *** 8.05 *** 8.07 *** 8.07 *** 8.05 ***
## (0.52) (0.53) (0.53) (0.52) (0.53)
## log of population -0.12 -0.10 -0.10 -0.08 -0.10
## (0.09) (0.09) (0.09) (0.09) (0.09)
## log of Area sq Km -0.18 *** -0.18 *** -0.18 *** -0.18 *** -0.19 ***
## (0.05) (0.05) (0.05) (0.05) (0.05)
## Log of distance -0.37 -0.39 * -0.39 * -0.38 * -0.38 *
## (0.19) (0.19) (0.19) (0.19) (0.19)
## log of GDP 1.29 *** 1.28 *** 1.30 *** 1.28 *** 1.29 ***
## (0.08) (0.08) (0.08) (0.08) (0.08)
## % of common religion 5.25 *** 5.22 *** 5.19 *** 5.11 *** 5.26 ***
## (0.71) (0.71) (0.74) (0.72) (0.71)
## Dummy for Common language 0.82 *** 0.85 *** 0.85 *** 0.86 *** 0.85 ***
## (0.18) (0.18) (0.18) (0.18) (0.18)
## Tag Investments 1.64 * 1.58 * 1.80 ** 2.04 ** 1.71 *
## (0.68) (0.74) (0.69) (0.73) (0.69)
## Tag Trade expansion 1.55 1.63 1.74 * 1.78 * 1.66 *
## (0.84) (0.84) (0.83) (0.83) (0.84)
## Tag Trade controls -1.95 *** -1.91 *** -1.86 *** -1.82 *** -1.90 ***
## (0.32) (0.33) (0.32) (0.32) (0.32)
## Tag animals,plants & wood prods 0.76
## (0.48)
## Tag Financial Affairs 0.59
## (0.94)
## Tag Arm sales -0.16
## (0.58)
## Foreign Assistance -0.92
## (0.86)
## Bussiness Proposals 0.27
## (0.43)
## ------------------------------------------------------------------------------------------------
## R^2 0.59 0.59 0.59 0.59 0.59
## Adj. R^2 0.58 0.58 0.58 0.58 0.58
## Num. obs. 1015 1015 1015 1015 1015
## ================================================================================================
## *** p < 0.001, ** p < 0.01, * p < 0.05First regression log of imp
##
## ================================================================================================
## Model 1 Model 2 Model 3 Model 4 Model 5
## ------------------------------------------------------------------------------------------------
## Dummy for diplomatic relations 7.73 *** 7.71 *** 7.71 *** 7.72 *** 7.71 ***
## (0.27) (0.27) (0.27) (0.27) (0.27)
## log of population -0.11 * -0.10 * -0.07 -0.13 ** -0.09 *
## (0.05) (0.05) (0.04) (0.05) (0.04)
## log of Area sq Km -0.14 *** -0.14 *** -0.15 *** -0.14 *** -0.15 ***
## (0.02) (0.02) (0.02) (0.02) (0.02)
## Log of distance -1.07 *** -1.09 *** -1.11 *** -1.12 *** -1.06 ***
## (0.10) (0.10) (0.10) (0.10) (0.10)
## log of GDP 1.06 *** 1.05 *** 1.03 *** 1.09 *** 1.06 ***
## (0.04) (0.04) (0.04) (0.04) (0.04)
## % of common religion 0.38 0.33 0.83 * 0.67 0.41
## (0.37) (0.37) (0.38) (0.37) (0.37)
## Dummy for Common language 0.28 ** 0.31 *** 0.33 *** 0.31 *** 0.30 **
## (0.09) (0.09) (0.09) (0.09) (0.09)
## Tag Investments 1.57 *** 1.32 *** 1.37 *** 1.06 ** 1.56 ***
## (0.35) (0.38) (0.35) (0.37) (0.35)
## Tag Trade expansion 1.76 *** 1.73 *** 1.77 *** 1.76 *** 1.78 ***
## (0.43) (0.43) (0.42) (0.42) (0.43)
## Tag Trade controls -1.08 *** -1.09 *** -0.97 *** -1.08 *** -1.07 ***
## (0.17) (0.17) (0.16) (0.16) (0.17)
## Tag animals,plants & wood prods 0.69 **
## (0.25)
## Tag Financial Affairs 1.16 *
## (0.48)
## Tag Arm sales 1.36 ***
## (0.30)
## Foreign Assistance 2.03 ***
## (0.44)
## Bussiness Proposals 0.55 *
## (0.22)
## ------------------------------------------------------------------------------------------------
## R^2 0.80 0.80 0.80 0.81 0.80
## Adj. R^2 0.80 0.80 0.80 0.80 0.80
## Num. obs. 1015 1015 1015 1015 1015
## ================================================================================================
## *** p < 0.001, ** p < 0.01, * p < 0.05