Growing Together: Economic Integration for an Inclusive and - escap

i. Estimates of regional trade flows
Annex: Technical notes
The forecast trade flows for the period 2011-2016 shown in figure II.1 are based on estimates
of regional trade flows using the gravity equation. The upper forecast is based on a model that
includes a time trend, namely
,
where x ijt are the logarithms of exports from region i to region j in year t, y it and y jt are the
logarithms of the GDPs of regions i and j in year t, and ε ijt is a non-observable error term. The
coefficients β ij capture unobserved and time-invariant factors unique to exports from region i
to j, such as geographical distance or trade costs. This model was estimated for the period 1993-
2010 using data from the International Monetary Fund, Direction of Trade Statistics and the United
Nations Statistical Division, National Accounts Main Aggregates database. The upper forecasts
were calculated using the estimated equation
for the years 2011-2016 based on GDP forecasts from the International Monetary Fund, World
Economic Outlook database.
It is important to keep in mind that the estimate coefficient for the time trend 0.1821, or 1.8 per
cent, per year, is based on trade data for a period of fast-increasing commodity prices. If these
trends continue during the forecast period, the forecasts will be accurate, but this is uncertain. For
that reason a more conservative, lower forecast was also considered in order to provide a range
of possible future trade values. The more conservative forecast is based on the following model
,
which includes time effects instead of a time trend, and was estimated as
,
^
For the forecast period, the estimated time effects β were set to zero, which is their average value
t
during the estimation period. In other words, these lower forecasts assume no time effects (neither
positive nor negative) for the period 2011-2016.
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