Cultural Distance : An Assessment of Cultural Effects on Trade Flows

This thesis will investigate trade patterns among 77 selected countries and how these pat-terns may be affected by cultural attributes such as similarities in culture, institutions, common border, language, and such cultural characteristics. A cultural- and institutional distance measure will be calculated using the Pythagorean Theorem to assess the various cultural and institutional differences among countries. In more economic terms, a Euclid-ian space between the countries’ scores on each cultural and institutional index is calculated into one measure. By the use of the gravity model an econometric analysis will be performed with 12 included variables in order to come to a conclusion if, and to what extent, various cultural distance measures affect trade flows. Due to scarce data availability in some of the variables the analysis is bound to the selected 77 partner countries and one time period ranging from 2003-2005. The dependent variable, and the trade flow considered in this thesis, is exports among the included countries. The results from the performed regressions show excellent results where all variables are significant and are shown to have an effect on trade flows. Moreover, the result indicates that being similar when it comes to cultural attributes is indeed preferential for the trade partners. That is, trade increase when countries cultural affinities are large