Do Larger Economies Trade More? Evidence from India

Abstract

International trade contributes significantly to a country’s economic growth at various stages of a nation’s development. Trade promotes competition and results in a more efficient allocation of resources and, hence, higher efficiency. Trade also encourages technological progress, technology transfer across countries, and development of new products, to name a few. This paper has two objectives- 1) To examine various trade theories on how trade impacts an economy’s growth, and 2) To analyse the trade data for India’s leading trading partner countries, and examine consistency of such data with predictions of the “Gravity model of trade”. Various trade theories are explained – the “Ricardian model of trade” (19th century) also known as the “Comparative Advantage Theory”, “Heckscher-Ohlin Model” (1920’s), also called the “Factor Proportions Theory”, “New Trade Theory” (NTT) by Paul Krugman (1979), “New-New Trade Theory” by Melitz (2003) and the “Gravity model of trade” by Tinbergen (1962). The predictions of the “Gravity model of trade” are tested for India using the 2021 data of the country’s leading export and import partners. The data shows the top three trading partner countries for India are the US, the UAE and China. These countries are large economies and hence consistent with the predictions of the Gravity model. Bangladesh is India’s 4th largest exporting partner – which is explained by the historically close cultural ties between India and Bangladesh facilitated by common language and borders. Overall, we can say that India’s trade data is consistent with the predictions of the Gravity model. India trades more with larger economies and those countries that are in close proximity in terms of cultural ties and distance.