Year of Graduation
The More Similar the Levels of Per Capita Income of Countries Are, the More They Will trade With one Another
Double degree programme in Economics of the NRU HSE and the University of London
This paper investigates the Linder Hypothesis, which argues that the more similar the levels of per capita income of countries are, the more they will trade with one another. The work investigates the significance of this theory on the example of three Baltic States for the 1994-2015 period. Such narrow focus is best explained through our decision to test the Linder hypothesis more than once. Given the geographical proximity of Estonia, Latvia and Lithuania, and their similar geopolitical interests, the variation of their trading partners was found to be very insignificant. Our econometric model included a range of variables, such as the exporter’s and importer’s GDP, the GDP per capita difference (as a reflection of the tested hypothesis), the distance and the presence of a common coloniser. The variables that were found to be most significant for tradeare the exporter’s GDP and the distance between countries. The GDP per capita difference, on the other hand, was proven to be insignificant. Moreover, the coefficients of this variable had a positive sign, meaning that the bigger difference between the GDPs causes more trade in the case of Baltic States. Therefore, the empirical findings of this research paper reject the Linder Hypothesis.