The Gravity Model and Trade Efficiency: A Stochastic Frontier Analysis of Eastern E uropean Countries' Potential Trade

Abstract The opening up process of the eastern E uropean countries is characterised by an increasing degree of trade integration with their Western neighbouring countries. Typically, the degree of E ast– W est trade integration is assessed by comparing actual trade volumes with potential trade volumes projected from the gravity model parameters estimated for a group of countries that best represent normal trade relations. This approach, however, does not compare trade levels against a maximum level of trade feasible for the group of eastern E uropean countries. This paper using a stochastic frontier specification of the gravity model is able to identify the efficiency of trade integration relative to maximum potential levels. The findings, based on a panel data set of bilateral exports from 17 W estern E uropean countries to the 10 new member states over the 1994–2007 period, indicate a high degree of E ast– W est trade integration close to two‐thirds of frontier estimates, suggesting a low degree of trade resistances.