Globalization, Economic Integration and Trade Potential: Analysis of Gravity Model in the Iranian Trade Processing

The purpose of this paper is to empirically analyze Iran's trade patterns based on the gravity model and to suggest possible ways to expand trade by identifying important factors determining Iran's bilateral trade flows. This study will, in particular, look at the influence of the bilateral trade structures and regional economic blocs on Iran’s bilateral trade flows with special focus on the Persian Gulf countries, and countries of the Indian Ocean. This study uses the data which include bilateral flows of Iran's trade with the Persian Gulf countries and countries of the Indian Ocean over the period 1994-2005. The panel date approach is employed to estimate the augmented gravity model. The model adds a certain number of dummy variables to the original gravity equation that test for specific effects. According to the regression results of the analysis, trade potential increases Iran's trade with the Persian Gulf countries, and countries of the Indian Ocean by 5 and 25 percent, respectively.