Determinants of Ghana’s Bilateral Trade Flows: A Gravity Model Approach

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This study seeks to identify the internal and external factors that matter for Ghana’s bilateral exports and total trade flows within the framework of an augmented gravity model. Utilizing a panel data covering 25 major trading partners of Ghana from 1995 to 2011, the study employs panel cointegration analysis, aside the conventional fixed effects and random effects estimators, to establish the existence of and to estimate the long run relationship among Ghana’s bilateral total trade and exports and their respective determinants. The empirical results reveal that improvement in Ghana’s GDP and that of its partners, growth in foreign population, depreciation in real bilateral exchange rate, higher trade freedom of partners, and the inflow of foreign direct investment are robust positive and significant determinants of Ghana’s bilateral exports and total trade. Geographical distance, Ghana’s population and internal transport infrastructure are found to have significantly deleterious impact on Ghana’s bilateral trade flows. It is also found that the level of Ghana’s institutional quality and sharing common language with partners exert positive but statistically insignificant impact on the nation’s bilateral trade flows. The study concludes that the current government’s budgetary focus of massively expanding, upgrading and modernizing trade-related infrastructure in Ghana is a stride in the right direction and must be anchored with policies aimed at improving the overall efficiency and effectiveness of domestic institutions so as to create the needed incentives for economic agents, both at home and abroad, to engage in trade and invest in Ghana’s exports sectors.
A Thesis submitted to the Department of Economics, Kwame Nkrumah University of Science and Technology, in partial fulfillment of the requirements for the award of Master of Philosophy Degree in Economics.