Problem Statements Factors Influencing Indonesian Cocoa Export to the European Union
life” in the field of research Deardorff, 1998. The gravity equation’s ability to correctly approximate bilateral trade flows makes it one of the most stable
empirical relationship in economics Leamer and Levinson 1995 Gravity model for international trade considers the bilateral trade as the
“gravity force” between two countries and suggests the same relationship between this force, masses of the countries proxied by GDP and the distance between
them. The basic gravity model is developed by Tinbergen in the 1960s
explaining bilateral trade between two countries depending positively on their economic sizes and negatively distances between them. Tinbergen 1963
explained that an economic model describing international trade flows can be formulated in varying degrees of detail. The model consists of only one equation
in which the value of total exports from one country to another is explained by a small number of variables. The explanatory variables that play a preponderant role
are: a. The Gross National Product GNP of the exporting country;
b. The Gross National Product of the importing country; and c. The distance between the two countries.
In several calculations other explanatory variables were introduced; however, their contribution to an explanation of the value of exports was very
limited as compared to that the three main variables. Other important characteristics of the present analysis are that:
a. No separate demand and supply functions for exports are introduced-meaning that the equation is a turnover relation in which prices are not specified; and
b. Only a statistic analysis is made – no attention is paid to the development of exports over time.
For estimating purposes, the traditional gravity model of international trade could be written in the form:
X
ji
= β0 GDP
j β1
GDP
i β2
D
ij β3
ε
ij
Where X
ji
stands for the bilateral trade between countries i and j; D
ij
is a distance between these two countries; ε
ij
stands for the error term and β , β
1
, β
2
and β
3
are parameters to be estimated. We assume that the error term ε
ij
is statistically independent on the other regressors; moreover, we further assume that E ε
ij
GDP
i
, GDP
j
, D
ij
= 1. This assumption leads to:
E X
ji
GDP
i
, GDP
j
, D
ij
= β0 GDP
j β1
GDP
i β2
D
ij β3
However, the gravity model is identified in multiplicative form, which does not permit for employing standard estimation techniques. The traditional
way in the literature how to deal with estimation of multiplicative form of the model is to estimate the logarithmic transformed model:
ln X
ji
= ln β + β
1
ln GDP
j
+ β
2
ln GDP
i
+ β
3
ln D
ij
+ ln ε
ij