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Korea's Trade Pattern using Gravity Model

The gravity model derived from the physics field is used in international trade theory as a tool to justify that the flows of bilateral trade are influenced by GDPs and geographical factors of the countries of interest. Thus, the assumptions taken when using this model are that there exists a positive relationship between the bilateral trade flows and GDPs of the two countries as well as a negative relationship between trade flows and the distance between the countries (Svenaeus, 2012). The use of gravity model has shown strong analytical abilities, but the lack of theoretical basis has made it ignored by economists.

The economic basis of gravity model has significantly grown as a result of its successful application by economists Krugman and Leamer. With the ever growing interest in understanding economic geography, gravity model has been widely used to predict patterns of international trade (Peter, Bergeijk & Brakman, 2010). Many studies have, therefore, tried to formulate equations that take into consideration the factors that are likely to influence flows of bilateral trade.

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Sohn (2001) applied the gravity model to analyze the Korea’s trade patterns and was able to identify the impacts of regional trade arrangements on them. He conducted a cross-sectional analysis using the bilateral trade patterns of Korea and thirty countries that were considered the main trade partners from all parts of the globe. For unbiased results, not to include distortions experienced in imports and exports in 1997, the study chose 1995 as the base year.

The model incorporated dummy variables so as to determine the contribution of trade agreements at the regional level on the overall Korea’s bilateral trade patterns. The regression results gave the total R-square value of 0.786. This is a good performance which shows that the gravity model sufficiently explains the patterns of the Korea’s bilateral trade. The GDPs gave a statistically significant value with a coefficient of 0.728 (Sohn, 2001), which implies that if all other variables are held constant, increasing GDP by one percent causes an approximate 0.73 percent rise in the Korea’s bilateral trade patterns. Thus, such outcome proves that the assumption that an increase in trade volumes occur when the economic size increases is satisfied.

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On the other hand, it is observed that the variable denoting the per capita GDP does not significantly influence the trade flows in Korea. This is inconsistent with the results obtained from Frankel’s regression analysis. Such data is an indication that the bilateral trade patterns in Korea are highly dependent on the pattern or GDP rather than that of per capita and rely more on the economic size of the partners rather than the level of income. Therefore, Korea would choose to export a lot of cheap products which are highly demanded rather than export high quality improved products that are only required by a few people who can afford (Sohn, 2005).

Considering the distance as a variable used in the model, it was found that it is an essential resistance factor that influences bilateral trade patterns. Distance represents barriers which include access to the market, time, transportation expenses, and cultural difference. It should be mentioned that the log of distance between Korea and each of the partner countries is consistent with the results obtained in previous studies.

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In conclusion, the gravity model clearly shows that the trade patterns of Korea are highly determined by the GDP and the geographical distance between it and the trading countries. For each of the main trade partners, the coefficient of GDP obtained using the gravity model shows a positive relationship with the bilateral trade patterns. This shows that the economic size of the country has significant positive impact on the Korea's trade patterns. Furthermore, the gravity model shows that the farther certain country is from Korea, the more negatively impacted become the trade patterns. Korea should, therefore, focus on enhancing bilateral trade with the countries that are situated not far from it and have large economies.

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