Expanding the Trading Partners and Trading Volumes

To research the development of bilateral trade flows, a model of international trade is being applied. This model is based on the heterogeneous firms literature and the gravity equation. The two-stage estimation procedure, proposed by Helpman, Melitz and Rubinstein (2008), provides for a proper instrument to decompose bilateral trade flows over both the intensive (amount of exports) and extensive margin (number of exporters) of trade. In the first stage, the selection of trading partners is being calculated by a Probit equation. Then, the second stage estimates the volume of trade via both the Nonlinear Least Squares (NLS) estimation and the Polynomial approximation. The procedure corrects for both the sample selection bias and the heterogeneity bias. Here, bilateral trade flow data for 1981, 1986, 1991, 1996, 2001 and 2005 are taken into account, to obtain insight in the underlying determinants of bilateral trade flows throughout the years.