A Multifaceted Panel Data Gravity Model Analysis of Peru’s Foreign Trade

Abstract. Peru’s abundant natural resources and friendly trade policies have made the country a major economic player in both South America and the global community. Consequently, exports are playing an increasingly important role in Peru’s national economy. Indeed, growing from 13.1% as of 1994, exports now contribute approximately 21% of the GDP of Peru as of 2015.Given Peru’s growing global influence, the time is ripe for a thorough analysis of the most important factors governing its export performance. Thus, within the framework of the augmented gravity model of trade, this paper examines Peru’s export performance and attempts to identify the dominant economic factors that should be further developed to increase the value of exports. The analysis was conducted from three different aspects: (1) general economic parameters’ effect on Peru’s export value, (2) more specific analysis into a major specific trade good, copper, and (3) the impact that regional trade agreements have had on Peru’s export performance. Our panel data analysis results for each dataset revealed interesting economic trends and were consistent with the theoretical expectations of the gravity model: namely positive coefficients for economic size and negative coefficients for distance. This report’s results can be a reference for the proper direction of Peruvian economic policy so as to enhance economic growth in a sustainable direction.Keywords. Gravity model, Fixed effect, Random effect, Instrumental variables GMM regression, Exports, Copper, Panel data, Peru, Regional trade agreements.JEL. F10, F12, F40, F41