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Testing the Linder hypothesis in the case of EU-15 countries

This paper investigates the validity of the Linder hypothesis in the case of EU-15 countries. The Linder hypothesis is one of the new theories of international trade which states that the greater the similarity between countries’ economic structures or preferences, the greater is the trade between them. The Linder theory predicted that most trade should occur between developed countries or “the North- North” direction of trade as opposed to “the North-South” pattern of trade between developed and developing countries. In order to investigate whether the patterns of trade of EU-15 countries are in accordance with the Linder hypothesis, a panel regression gravity model was constructed in the period from 2001 to 2017. The panel regression gravity model is estimated using pooled OLS, fixed and random effects models. The Linder effect is captured through the Linder variable expressed as an absolute difference between GDP per capita of importing and supply market countries. The augmented gravity model included additional dummy variables ; adjacency and EU-15 membership dummy. The results of the analysis have shown that bilateral EU-15 countries’ imports are positively correlated with the value of GDP of supply market countries, the Linder variable, adjacency and EU-15 membership dummy leading to the rejection of the Linder hypothesis. On the other hand, bilateral EU-15 countries’ imports are, as expected, negatively correlated with the distance variable.

Linder hypothesis ; EU-15 ; gravity model ; panel data

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