A GRAVITY MODEL FOR ECUADOR WITH THE MAIN TRADING PARTNERS

Abstract

This article aims to analyze Ecuador’s bilateral trade flows at the macroeconomic level for a set of 31 countries from 1996 2018.
To implement the gravity model, trade flows explained by the Gross Domestic Product (GDP) of the country of origin
and the GDP of the foreign country, as well as the geographical distance between Ecuador and its trading partners, are used
as variables. Three models were considered: first-difference, random effects, and fixed effects. The first differences model
is estimated using ordinary least squares combined; the random effects model is estimated using generalized least squares,
and the fixed effects model with inferred time series data. The main results were that Ecuadorian GDP and destination
country GDP is positively related to trade flows, while geographical distance is an inversely proportional variable. The
three models presented do not hold these results except for foreign GDP. In addition, it was found that dollarization has not
affected Ecuador’s trade flows, fulfilling the hypothesis that higher imports compensate for lower exports. In turn, the trade
agreements variable is not statistically significant.