Abstract
Gravity equations have been used repeatedly to predict the East-West trade potential since the opening-up of Eastern Europe in 1989. Most of the research in the field was done by means of cross-section data. While earlier studies indicated huge unexhausted bilateral trading potentials for the East and for the West, more recent studies have demonstrated that most of the East-West trading potential has already been consumed. In this paper, we provide insights into the prediction performance of cross section gravity equations (applied for level projections). We found rather large forecast interval spans around the predicted values. The intervals are of a size that makes any conclusions about absolute trade potentials questionable. Thus we think that cross-section gravity analysis does not permit any definite judgment as to whether actual East-West trade has already reached its potential level.
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Breuss, F., Egger, P. How Reliable Are Estimations of East-West Trade Potentials Based on Cross-Section Gravity Analyses?. Empirica 26, 81–94 (1999). https://doi.org/10.1023/A:1007011329676
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DOI: https://doi.org/10.1023/A:1007011329676