Impact of FTA on international trade - Research Paper Example

ble indicated the geographical distance between the largest cities of the countries involved in free trade agreements reflecting the intangible and tangible trade costs. The results were expected to be negative with a longer distance as the cost increased with distance (Braga and Mendez, 1983). Language and adjacency were the dummy variables that indicated trade costs such as transportation cost as well as cultural similarity. The adjacency variable indicated the value of unity of countries sharing a common border while language variable indicated the value of unity if common official languages shared among the involved countries.

The binary variable FTA was important in capturing “the general FTA effect on trade flows.” The variables were constructed based on 22 regional trade agreements as well as 86 bilateral trade agreements up to 2006 (Chen and Tsai, 2005). The nested dummy variable is Timedum was used for capturing the external annual time effect at the period. The data was collected through primary as well as secondary sources. Primary data was collected by the help of observations and by conducting interviews; whereas the secondary data was collected from scholarly sources.

The sample for estimation of the information includes 178 countries between the period of 1985 to 2005. For the study, the sample was constructed through expansion of the dataset as constructed by Rose (2005). The bilateral trade values, GDP per capital, distance, GDP, language and adjacency variables from the data were set and were expand using the International Financial statistics of IMF (international monetary fund) and the Direction of Trade Statistics. The trade data was taken from the Direction of Trade Statistics (DOT).

The dummy variables, i.e., distance, language, Adjacency are kept constant for the study. In the estimation method, a structural change test was first conducted because the sample had a long time series dimension. The cumulative sum of recursive residual