Theoretical foundation for the Pareto distribution of international trade strength and introduction of an equation for international trade forecasting

TL;DR

This paper develops a theoretical basis for the Pareto distribution of international trade strength, introduces an equation for trade forecasting, and validates it with global trade data.

Contribution

It establishes a theoretical foundation linking trade strength distribution to the Pareto model and proposes a new forecasting formula validated with empirical data.

Findings

Trade strength follows a Pareto distribution.

The theoretical Pareto parameter closely matches empirical estimates.

A new trade forecasting equation is proposed and validated.

Abstract

I propose a new terminology, international trade strength, which is defined as the ratio of a country's total international trade to its GDP. This parameter represents a country's ability to generate international trade by utilizing its GDP. This figure is equivalent to GDP per capita, which represents a country's ability to use its population to generate GDP. Trade strength varies by country. The intriguing question is, what distribution function does the trade strength fulfill? In this paper, a theoretical foundation for predicting the distribution of trade strength and the rate of change of trade strength were developed. These two quantities were found to satisfy the Pareto distribution function. The equations were confirmed using data from the World Integrated Trade Solution (WITS) and the World Bank by comparing the Akaike Information Criterion (AIC) and Bayesian Information Criterion (BIC) to five types of distribution functions (exponential, lognormal, gamma, Pareto, and Weibull). I also discovered that the fitting Pareto power parameter is fairly close to the theoretical parameter. In addition, a formula for forecasting a country's total international trade in the following years was also developed.