RECURSOS HUMANOS

We make a number of adjustments to the empirical model to suit the estimation of the gravity equation. The population variables are replaced by per capita GDP variables. The volume of immigrant intakes is used to proxy the immigrant information effects on trade. The openness variable is used to proxy the tariff level. More details of these changes are discussed in the ensuing sections.

6.4.2.1

Per Capita Income Variables

Although the per capita income variables are not among the conventional variables included in gravity models, there are some advantages of using per capita income variables over population variables. The per capita income variables are not only valuable in revealing economic capacity of the trading partners but also valuable in revealing information about the stage of economic development of the trading partners and the wealth of the population. While the aggregate income variables in the gravity model relate to the production capacity, the per capita income variables relate to the consumption capacity. This in turn can be transformed into the purchasing power and the ability to demand goods and services. Unlike the population variables, which relate to the quantitative side of the market size, the per capita income variables relate to the intensity of the market which is the qualitative side or value side of the market size. Another advantage is that the coefficient of the per capita income variable in the gravity model with log-log transformation of the data would indicate the average income elasticity of demand for traded goods across the population.

The per capita income variable will not be highly correlated with the aggregate income variable in the model because the two variables are collected from two different data sources

and the data collection methods used by the data collectors are different.55 The per capita

income data are not obtained by simply dividing the total income by the population (if this was the case, the two variables will be highly correlated).

For the expected impact of per capita income on trade, a number of previous studies (refer to Section 5.6.3) found a positive relationship. However, we should be more cautious if we

want to keep our expectation in line with the results of some previous studies. They should

be viewed as ad hoc results rather than universally applicable theory. We make the

following assumptions about the impact of the per capita income variable on foreign trade: It is acceptable that the importing countries’ per capita income would have a positive impact on imports because it affects the demand on the demand side of the global economy. The exporter countries’ per capita income may not necessarily have a positive impact on exports since it affects the demand on the supply side of the global economy. It could depend on the marginal rate of transformation between exportable goods and the non-tradable goods and the marginal rate of transformation between all type of goods, e.g. inferior goods, normal goods and luxury goods in the exporter countries’ production sector. If the transformations are elastic or flexible, a rise in domestic per capita income would channel the former exportable goods into the domestic market, and exports will decline. If the transformations are not flexible, the now wealthier population will be unsatisfied by the domestic supply and could turn to imports, freeing more domestic goods available for exports. Following this argument, we expect that the importer countries’ per capita income would have a positive impact on imports, whereas the impact of exporter countries’ per capita income on exports is uncertain.

6.4.2.2

Immigrant Information Variables

Since it is impossible to quantify the amount of foreign market information carried over by immigrants, we use the volume of immigrant intake to proxy the immigrant effect on trade. However, by using the immigrant intake as the proxy, we encounter a contradictory impact on trade by the immigrant intake variables. On one hand, the immigration represents the movement of labour across countries. Its effect on trade follows the standard argument relating to the H-O model of factor price equalisation of inter-industry trade, and commodity price equalisation of factor movement (refer to Section 2.3 in Chapter 2). Thus, immigrant intake level variable is expected to have a negative impact on trade variable. On the other hand, we expect that immigrant information will facilitate trade, thus the impact would be positive (refer to Sections 2.4 to 2.6 in Chapter 2). We cannot separate the two contradictory effects that immigrants have on trade. However, at least we can have some idea about the magnitudes of each from the combined effect that we obtain from the

estimation. We can model the combined effect by using M_jit variable and 2

jit

M variable

jit

M and 2

jit

M ) is negative, then we know that the labour effect of trade substitution is

stronger than the foreign market information effect of immigration on enhancing trade. On the other hand, if the estimated coefficient is positive, the market information effect of immigrants enhancing trade offsets the trade substitution effect of labour.

The immigrant intake level influences the relative strength of both effects. Up to a certain level of immigrant intake, the foreign market information effect is stronger and the impact of immigration on trade is positive. The impact of immigration on trade will become negative if the immigrant intake level is higher than that level. Since we are unsure about which

effect is stronger so we cannot assign a priori expectation for the impact of the immigrant

intake variable on trade.

6.4.2.3

Tariff Variables

It is common knowledge within the economic and business arena that tariffs will reduce the volume of trade and serve as a trade impediment measure. However, it is extremely difficult to measure tariffs accurately. Since our objective is to investigate the impact of trade impediment, an Openness variable could be more appropriate. Openness is calculated by dividing the value of the country’s total trade by its total income, that is, total trade as a proportion of the total income (GDP). A higher Openness would indicate a more active engagement in the global trade system by the country, which could be the result of lower trade barriers. According to the definition of Openness, a more open economy would have a higher total trade to GDP ratio, hence a higher volume of trade over time. Thus, Openness would have a positive impact on trade.