11 the trade quantity. Economic distance is an international border for the trade
Melitz, 2006; Anderson, 2013. Conversely, the results from Meiri 2013 revealed that the high economic
distance will increase the trade quantity. However, hypotheses concerning the economic in most of the previous research indicate a negative effect on the trade
quantity. This occurs because high economic distance between exporting and importing countries will be offset by higher selling prices, further encouraging
trade with exporting countries.
Remoteness is a method that is frequently used to control the multilateral resistance terms for exporting and importing countries. This is frequently
calculated as: Rem
i
= More specifically, remoteness is a formula that measures a country’s
average weighted distance from its trading partners Head, 2003, where weights are the partner countries’ shares of world GDP denoted by GDP
W
. There are two criticisms that are usually made regarding the use of this
procedure, first, that it is not theoretically correct because the only type of trade barrier that it evaluates is distance Anderson and van Wincoop, 2003. Second, is
that it relates to the appropriate measure of internal distance, as the summation requires us to also specify also a country’s distance from itself Head and Mayer,
2000 in Bacchetta 2012, suggest using the square root of the country’s area multiplied by approximately 0.4.
Baier and Bergstrand 2009 suggest estimating a linear approximation by means of a first order Taylor series expansion of the multilateral resistance terms,
thus avoiding the non-linear procedure used in Anderson and van Wincoop 2003. Following this approach, the OLS reduced form gravity equation is:
��� = �
+ ����� + �����
− � − 1 �
ln � −
1 2
� �
ln �
+ � − 1
� ln �
− 1
2 �
� ln �
where time indices have been omitted for simplicity purposes, θ denotes GDP shares and t indicates trade costs. The terms in square brackets are the linear
approximation of the multilateral resistance terms MRTs. Intuitively, the first term in the bracket is a form of the remoteness term rather than only geographical
distance, the term reflects overall trade costs; the second term is a measure of world trade costs. Most importantly, this linearization shows that bilateral trade
between countries i and j depends on the level of bilateral trade relative to multilateral trade costs and multilateral trade relative to world trade costs. Note
that Bergstrand and Baier estimate Equation 3.11 to proxy trade costs with distance and border and θ with 1N where N is the number of countries
Bacchetta, 2012.
12
2.2.3 Exchange Rate
The exchange rate is the price of a currency against other currencies, or the value of a currency against other currencies. Changes in exchange rates will affect
international trade between two countries. Branda and Mendez 1988 in Ghosh 2005 showed that the risk of having a greater exchange rate encourages lower
trading volumes. This is supported by studies from Frankel and Rose 2002 in Ghosh 2005 who found that countries that have the same currency will display
an increase in the flow of trade.
Exchange rate is a variable that is often used in previous studies. The exchange rate can explain the phenomenon of research on the trade flow of a
commodity trade Meiri, 2013; Hadi, 2009 and Mega, 2013. Other studies have shown that the exchange rate effect is sometimes has positive sign and there is
also a negative sign in the coefficient. It means that effect on export volume can be positive or negative, depending on the case and the phenomenon in the study.
After reviewing the literature, the researcher of the present study has established that the variables that are most suitable for the gravity model of this
research are natural rubber production of exporting countries, real GDP of importing country, remoteness, and the real exchange rate. By using panel data
and completing a regression analysis, this research will be able to explain and answer questions relating to the natural rubber commodity in the international
market.
2.3 Research Hypothesis
The hypothesis used in this research is an alleged coefficient sign of the variables that affect the trade flow of natural rubber in international trade. Here
are the hypotheses of the research: 1.
Natural rubber productions from three main exporter countries have a positive relationship to the natural rubber trade.
2. Real GDP of export destination countries have a positive relationship to
the natural rubber trade. 3.
Remoteness has a negative relationship to the natural rubber trade. 4.
The real exchange rate has a positive relationship to the natural rubber trade.
3 THEORITICAL FRAMEWORK
The theoretical framework aims to explain the theories that are used to assist with implementation and process at every stage of the research. The theories used
in this study, are as follows: international trade theory, the concept of competitiveness, and the concept of gravity models.
13
3.1 Theory of International Trade
Trade is the transfer of the ownership of goods or services from one person or entity to another in exchange for other goods, services, or money. In the era of
globalization, trade does not only occur in a single country. Trade between two traders is called bilateral trade, while trade between more than two traders is
called multilateral trade. According to Oktaviani, et al. 2009, trade that is conducted between the population of one country and the population of another
country, on the basis of mutual agreement, is called international trade. Population can be either inter-individual individual to individual, between the individual
and the government of a country, or a state government with other governments.
Adam Smith 1776 first developed the theory of international trade. Adam Smith stated that trade among nations is influenced by its absolute advantages.
When a country has the best technology and specialization in the production of one good it has an absolute advantage. The country that has an absolute advantage
will gain from export. In 1821, David Ricardo developed the theory of comparative advantage. This theory state that even if a country has no absolute
advantage in producing two types of goods than any other country, the beneficial trade can occur as long as the ratio of prices between countries are different than
in an autarky situation. Furthermore, the development of trade patterns proposed by Eli Heckscher 1919 and Bertil Ohlin 1924 explained that the Heckscher
Ohlin HO theory is also called the factor-proportion theory because it stresses on the interaction between the different proportions of the country’s production
factors, as well as the differences in the usage of these factors on producing a wide range of items. The HO model predicts that a country tends to export the
good, which uses its abundant factor intensively.
The new trade theory is the modification of assumptions on the HO and Ricardian models result. The market
structure in this new trade theory is different than with perfect competition. The concept of monopolistic competition was introduced by Krugman 1980, and
states that the two main assumption are differentiated goods and increasing returns to scale. Krugman et al., 2012.
In both domestic and international trade, all of the participants traders, consumers, etc. are seeking benefit from the economic activity. Each country
trades to gain profit, as well as gain the more efficient incentive from the trade. In addition to the profit motive, Krugman, et al. 2012 revealed that the main
reasons for international trade are as follows:
1. Countries trade because they are different from each other. 2. Countries trade in order to achieve economies of scale economics of
scale. Theoretically, a country e.g.,: country A will tend to export a commodity,
Y, to another country e.g.,: country B, if the domestic price of commodity Y from country A prior to the international trade is relatively lower than the price
of the same commodity in country B. The relatively low prices in country A are caused by excess supply, which means that the domestic production exceeds
domestic consumption, thus enabling a country to sell its production to another country country B.
On the other hand, country B exhibits excess demand, which means that the domestic consumption exceeds domestic production. Consequently, the price of
