Essays on International Trade

Abstract

As the world progresses and countries continue to compete for dominance, economic development has become the key criterion in assessing of a country's strength. International trade is a catalyst of growth and the study of international economics enjoys immense popularity. Moreover, trade policies are often the only available effective tool for conducting foreign policy. Taking all of this into consideration I set out to make a contribution into the study of international trade, by fusing it with econometrics. The following essays discuss two important areas within the international trade field: the effect of distance on trade and the comovement of capital and labor. In both of these papers, my goal was to utilize newer econometric approaches in order to obtain better, more robust results. The first chapter analyzes the effect of distance on international trade by applying Pesaran's (2006) cross correlated effects mean group (CCEMG) estimator to the gravity model. The distance effect is then estimated to have remained constant during the 1980-2004 period, even increasing in one scenario, contradicting the popular notion that due to improved transportation, the role of distance as a barrier to trade has diminished. Further, since the CCEMG estimator is robust to slope heterogeneity within the data, the distance effect is estimated to be greater than previously believed. Finally, countries with fewer trading partners experience more volatility in distance effects than their counterparts with many export markets. In the second chapter, a two-sector, neoclassical model with nontraded goods is employed to show that the co-movement of labor and capital is a general conclusion in the small country case. The co-movement of factors when capital is mobile is analogous to a Rybczynski effect in the Heckscher-Ohlin model. We deduce from the model a co-movement equation that is linear in FDI and migration. We test this equation with a panel of 28 OECD countries using the Arellano-Bond estimation procedure. Our regressions affirm that co-movement is statistically significant, and it remains so even when the largest economies are removed from the panel.