International economics

1. This presentation provides Analysis of Trade Flows using the Gravity Model of Trade with a
Particular Focus on Exchange Rate Fluctuations between Costa Rica and Mali.
INTERNATIONAL ECONOMICS
ID: 00010854_00010359_00009324_00010484

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The Gravity Model of Trade
- Describes the influence of interactions between
nations on bilateral trade
- Supported by analysis of international
economics, particularly on the consequences of
bilateral, regional, and multilateral ties
- One of the most reliable empirical patterns in
economics

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Indicators and Theoretical
Foundations of the Gravity
Model of Trade
- Uses indicators such as GDP, distance,
population, language, culture, institutional quality,
infrastructure, and political factors to analyze
bilateral trade flows
- Theoretical foundation is based on the inverse
relationship between the distance and economic
size of two nations, meaning that trade flows
between two nations will increase as their
economies and distances from each other grow
- Other elements that might improve trade flows
are also impacted by the model, such as cultural
affinities and political relationships

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Data Sources for the Gravity
Model of Trade
- Most commonly used data sources are bilateral
trade data and economic data from international
organizations such as the World Bank, IMF, and
UNCTAD
- These organizations provide data on trade flows,
GDP, population, and other economic indicators
that can be used to analyze bilateral trade

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Impact of Exchange Rates on
Bilateral Trade Patterns
- Changes in exchange rates can significantly
affect bilateral trade patterns
- Can alter the relative costs of products and
services in each nation, influencing the exporting
nation's ability to compete and potentially
increasing or decreasing the cost of its products to
the receiving nation

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Exchange Rate and Bilateral
Trade
- Rose (2000) found that a 10% rise in exchange
rate volatility may cause a 1.5% drop in two
nations' bilateral commerce.
- Bahmani-Oskooee and Hegerty (2009) found
that exchange rate variations had a considerable
impact on bilateral trade flows.

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Gravity Model of Trade
- Determined to adopt the primary trade gravity
model for regression to construct the gravity
model of trade in Costa Rica and Mali.
- Expanded model to include other independent
variables, such as population of trading partners
and trade openness, based on research like
(Hernandez, 2022) and (Gulzar, 2017).

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Population and Circular
Economy
- Hernandez (2022) found a statistically significant
link between population of trading partners and
bilateral commerce, particularly for recycling trade.
- Increasing population leads to higher demand for
recyclable waste, prompting circular economy
initiatives.

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Trade Openness and Economic
Growth
- Trade policies and trade openness have been
key in rising countries for economic expansion,
according to research like (Gulzar, 2017).
- Implementation of trade liberalization policies
can lead to rapid economic growth.

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Factors Influencing Trade
Between Costa Rica and Mali
- GDP of both countries is statistically significant
and has a favorable impact on bilateral commerce
flow.
- BTF will increase by 0.695% for every 1%
increase in Costa Rica's GDP and by 0.7702% for
every 1% increase in Mali's GDP.
- Positive association between trade and trade
openness.

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Trade Policy Recommendations
for Costa Rica and Mali
- Emphasize the value of regional accords for
trade policy.
- A sound investment plan is important for
development, diversification, and job creation.
- Nations that are more open to the outside world
tend to perform better economically.
- Implement transportation and migration
management to assist emerging countries in better
integrating into global value chains.

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Other Factors That Influence
Trade
- Cultural, language, and political ties can also
influence trade flows.
- Exchange rate fluctuations can have a significant
impact on bilateral trade patterns.
- Available evidence suggests that they do affect
trade flows between Costa Rica and Mali and their
major trade partners.

18. Photo by Pixabay
Conclusion
- The gravity model of commerce is a helpful tool
for examining international trade.
- Population, distance, and GDP are the most used
indicators in the model.
- Understanding the factors that influence trade
can inform trade policy recommendations.

19. Thank you. Please feel free to ask any questions.

20. Reference
The World Bank (2022). Population, total. Data World Bank. Available from https://data.worldbank.org/indicator/SP.POP.TOTL
[Accessed 9 March 2023].
World Integrated Trade Solution (2022). Costa Rica trade balance, exports and imports by country
https://wits.worldbank.org/CountrySnapshot/en/CRI [Accessed 9 March 2023].
Gulzar, A. (2016). Does Trade Openness have Noteworthy effect on Bilateral Trade Flows of E.C.O. Countries, an Empirical
Investigation. Timisoara Journal of Economics and Business 9(2). Available
from:https://www.researchgate.net/publication/321199486_Does_Trade_Openness_has_Noteworthy_effect_on_Bilateral_Trade_Fl
ows_of_ECO_Countries_an_Empirical_Investigation [Accessed 9 March 2023].
Hernández, O. (2021). Determinants of Costa Rica’s International Trade of Wastes and its relationship with the circular economy.
Scientific Electronic Library Online. Available from: http://dx.doi.org/10.15359/ri.94-1.6 [Accessed 9 March 2023].
Bahmani-Oskooee, M., & Hegerty, S. W. (2009). Exchange rate volatility and trade flows: a review article. Journal of Economic
Studies, 36(3), 216-256. https://ideas.repec.org/a/eme/jespps/01443580710772777.html [Accessed 9 March 2023].
Rose, A. K. (2000). One money, one market: Estimating the effect of common currencies on trade. Economic Policy, 15(30), 7-46.
https://faculty.haas.berkeley.edu/arose/Grav.pdf [Accessed 9 March 2023].