A Panel Data Analysis of Bangladesh’s Trade: The Gravity Model Approach

Attempts are made to provide a theoretical justification for using the gravity model in the analysis of bilateral trade and apply the generalized gravity model to analyse the Bangladesh’s trade with its major trading partners using the panel data estimation technique. We have estimated the gravity model of trade (sum of exports and imports), the gravity model of export and the gravity model of import. Our results show that Bangladesh’s trade is positively determined by the size of the economies, per capita GNP differential of the countries involved and openness of the trading countries. The major determinants of Bangladesh’s exports are: the exchange rate, partner countries’ total import demand and openness of the Bangladesh economy. All three factors affect the Bangladesh’s exports positively. The exchange rate, on the other hand, has no effect on the Bangladesh’s import; rather imports are determined by the inflation rates, per capita income differentials and openness of the countries involved in trade. Transportation cost is found a significant factor in influencing Bangladesh’s trade negatively. Also Bangladesh’s imports are found to be influenced to a great extent by the border between India and Bangladesh. The country specific effects show that Bangladesh would do better by trading more with its neighbouring countries. Multilateral resistance factors affect Bangladesh’s trade and exports positively.