Potential bilateral trade between South Africa and Angola in the agricultural sector : a gravity model approach

Abstract

This study applies the gravity trade model to assess South Africa-Angola trade potential in the agricultural sector. A step-by-step example of the model's empirical implementation is also provided. It is found that the gravity model, with foundations in the physical sciences, is a useful instrument for the analysis of bilateral trade flows. A panel data analysis is used to disentangle the time invariant country-specific effects and to capture the relationships between the relevant variables over time. The study also finds that the fixed effects model is to be preferred to the random effects gravity model. Furthermore, a number of variables, namely, size of the economies, the oil price and exchange rates added to the standard gravity equation, are found to be important determinants of bilateral trade flows. Overall, the simulation results indicate that there is a potential for trade in the agricultural sector between these two countries.