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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
1999 finds a negative population coefficient which means a negative relationship between population and trade flows, suggesting that imports and
exports are capital intensive in production. Moreover, according to Bertrand 1989 the impact of population on trade
may also differ depending on the length of the estimation period short term vs. long term. Population may have a positive impact on trade flows in the short run,
since it may increase the amount of labor force, the level of specialization and more products to export as a result.
2.3.3 Distance
The concept of bilateral distance is the main determining characteristic of the gravity model and thus measurement issues related to distance are key to the
validity of any empirical application, but also to the interpretation of the result of the econometric findings. Economics is no physics. In the natural sciences
distance is well defined and its measurement can be exact and unambiguous. Economic distance however is a multifaceted concept, and measurement and
interpretation accordingly are subject to continuous debate. Originally distance entered the model because it could be used as an approximation of transportation
cost and transport time. Also distance was used as a measure for the “mental” distance of exporters and importers that increases with distance. New and
challenging measures of intangible distances related to different legal and economic institutions, different cultures and different technologies have recently
been added to the gravity model Martinez-Zarzoso and Marquez-Ramos 2005; Dekker et al.2006. Furthermore, larger distances between countries are expected
to decrease bilateral trade Rose et al, 2000.
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2.3.4 Exchange Rates
Another variable supposed to affect the level of international trade is the exchange rates. Including exchange rates is also a common practice in the gravity
literature, as the depreciation of a currency makes the exports of a given economy more competitive in the rest of the world as they get cheaper Anderson and Van
Wincoop, 2003. We expect a positive sign for exchange rates because depreciation of home country relative to the foreign country currency will lead to
more export and less export for the home country. Zarzoso and Lehman 2003 apply the gravity trade model to asses
Mercosur-European Union trade and trade potential following the agreement reached recently between both trade blocs. The model is tested for sample 20
countries, the four formal members of Mercosur, Chile, and fifteen members of the European Union. The research finds that exchange rate is one of the important
variables of bilateral trade flows. Exchange rates, in some cases, have no influence to explain some
country’s trade. Rahman 2006 who analyzes the Bangladesh’s trade with its major trading partners using the panel data estimation finds that exchange rate has
no effect on the Bangladesh’s import. This also happen in export behavior of Ethiopia which is investigated by Taye 2009. He finds that real exchange rate is
statistically insignificant to determine Ethiopia’s export performance.
2.3.5 Export Tax
The compound effect of export taxes on trade is ambiguous, depending on market structure and market power of the applying country. Export tax can
decrease domestic production, but increase domestic consumption and production
of downstream industries. Overall the impact of export tax on trade is expected to be negative Solleder, 2012 that export taxes negatively affect export values and
quantities of tax imposing nations. Burger 2007 conducted research on cocoa export tax by a case study on Cocoa commodity contained in the Ivory Coast. His
research concluded that the Ivory Coast who has contributed 40 percent of world cocoa demand almost did not get the benefit of the export tax changes.
Moreover with the above mentioned variables, international or bilateral trade is affected by many other factors such as common language, common
border, and colonial ties, being in the same trade union or free trade area, sharing a common culture and religion and so on.
Mehanna 2003 analyzes the effects of politics, as represented by political freedom and corruption, and cultures as represented by religion and language
affiliation, on Intra-Middle East trade for the period 1996-1999 for sample of 33 countries. It employs an extended version of the gravity model by controlling for
oil exporting countries. The results showed that religion and culture has a statistically significant effect on the Middle-East trade. However, corruption is
shown to have a highly statistically negative effect on both exports and imports in the Middle East. In addition she finds that the level of political freedom in these
countries does not statistically affect Middle-East trade. Gassebner et.al 2006 even includes disaster variable to gravity model in
their paper which examine the impact of major disasters on international trade flows using a gravity model. Their research consists of more than 170 countries
for the years 1962 - 2004 yielding approximately 300.000 observations.
IV. THEORITICAL FRAMEWORK
3.1 Theory of International Trade on Indonesian Cocoa.
No country in the world that can live without interaction with other countries. As rich as any natural resources, a country would require other states in
ensuring the survival of its people. International trade is a form of interaction between countries is one important issue in world economic activity. It is then not
only related to economic issues, but then also extends to political and social issues.
International trade in principle arises as a result of the interaction between demand and supply is competitive. This is not apart from the concept of absolute
advantage and comparative advantage. Adam Smith stated that the concept of inter-state trade is affected by absolute advantage. If a country produces a
commodity with a more cost efficient than other commodities and also compared with other countries so the concept of specialization of production would be more
beneficial for the country. This means that a country does not need to produce all the required items.
Tabel 3. Absolute Advantages Commodity
Indonesia Malaysia
Rubber 1 unit 2
4 Tobacco 1 unit
4 2
Total 6
6 With the advantage absolute different in each country, each country does
not need to produce all the goods. Malaysia and Indonesia can share the role. For one unit of rubber Indonesia requires less labor than Malaysia. Meanwhile, for a
unit of Malaysian tobacco requires less labor than Indonesia. Therefore, Indonesia
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