Australia's global trade potential: evidence from the gravity model analysis

Abstract

This paper attempts to investigate trade potential for Australia using the augmented gravity models and cross section data of 50 countries. OLS has been used as an estimation technique for 2001 and 2005 data. The estimated coefficients from the gravity models are then used to predict Australia's trade potential. Theoretical justification for using the gravity model to analyse bilateral trade flows is also re-affirmed. Our results reveal that Australia's bilateral trade is affected positively by economic size, per capita GDP, openness and common language, and negatively by the distance between the trading partners. The estimated results also show that Australia has tremendous trade potential with Singapore, Argentina, the Russian Federation, Portugal, Greece, Chile, the Philippines, Norway, Brazil and Bangladesh. Against the backdrop of Australia's historic trade deficit and lower and unimpressive share in the world trade, this study is crucial and will play a contributory role for the policy makers in particular and for the economies of Australia and its trading partners in general.