Exploring Australia's global trade potential: a gravity approach with panel data

Abstract

This paper investigates Australia’s global trade potential taking data of Australia and its 57 trading partners for the period of 1972-2006. Gravity model approach and panel data estimation techniques have been used. Providing a theoretical justification for using the gravity model the paper first estimates the augmented gravity models of trade. The estimated coefficients are then used to predict Australia’s trade potential. Our results reveal that Australia’s bilateral trade is affected positively by income, openness of trading partners, common language and free trade agreement, and negatively by the per capita income differential and distance between Australia and trading partners. The results indicate Australia has notable trade potential with Mexico, Argentina, Uruguay, Austria, Peru, India, the Philippines, Brazil, Chile, the USA, New Zealand, Greece, Japan, Turkey, Nepal, Kenya, Spain, Hungary, Brunei, Hong Kong, South Africa, Pakistan and Canada.