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

2.3 Gross Domestic Product GDP, Population, Physical Distance, Exchange Rate, and Export Tax

2.3.1 Gross Domestic Product

Gross domestic product is used to measure the country’s total output. It is one of the primary indicators used to gauge the health of a country’s economy. Economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. According to the gravity model, a large economy spends more on imports and exports. GDP influence country’s ability towards trade flows. The higher GDP of one country means more trade for a country. Bergstrand 1989 reports a positive GDP per capita coefficient. He interprets a negative GDP per capita coefficient in a way that the product group which is subject to the estimation is not capital intensive but labor intensive. However, in the long run higher population has a tendency to decrease income per capita, making every individual poorer, and therefore it may cause production and exports to decrease. In addition to that, lower income per capita tends to decrease the demand for imports as well.

2.3.2 Population

Big population can possibly increase trade flows between countries. It is possible to extend the basic gravity model by including the populations of exporting and importing countries to see what the effect of population on bilateral trade flows between two countries is. It is possible to modify the basic gravity model by including populations of exporting and importing counties to know the effect of population on bilateral trade flows between two countries. Matyas 1997 conclude that population has a tendency to increase trade and the level of specialization by producing gains from specialization. On contrary Dell’Ariccia