Gravity model of trade: the case of Serbia

The main objective of this thesis is to examine the major factors of Serbia’s foreign trade in order to estimate the export and import functions. The analysis is based on the gravity model of international trade. The panel dataset includes 40 countries for a ten year period from 2006 to 2015 which derives 400 observations. The estimation is done based on the pooled OLS, random and fixed effects models. The results of the Breush-Pagan test shows that the estimation results of the random effects model are the most appropriate. The results reveal that the economic size, both of Serbia and its trading partners, distance, similar language and free trade agreements have a major impact on Serbia’s trade. On the other hand, a common border appears insignificant. Furthermore, the export potential is calculated for all trading partners included in this research. The trade with most of the countries seems to be under or near to its potential.