JÖNKÖPING INTERNATIONAL BUSINESS SCHOOL
JÖNKÖPING UNIVERSITY

T h e D y n a m i c s o f Tr a d e A f f i n i t i e s
An Assessment of the Globalization of the European Continent

Master thesis within Economics Author: Tutor: Louise Buhre Professor Börje Johansson Ph.D. Candidate Tobias Dahlström Jönköping May 2008

Master Thesis in Economics Title: Author: Tutors: Date: The Dynamics of Trade Affinities – An Assessment of the Globalization of the European Continent Louise Buhre Professor Börje Johansson and Ph.D. Candidate Tobias Dahlström May 2008

Subject terms: Trade affinities, Globalization, Gravity Model, Trade flows

Abstract
This thesis is an assessment of the dynamics of trade affinities and how they have influenced trade flows in the European continent. The focus is how trade affinities have altered over a time span of four time periods stretching from the 1970s up to today and how these alterations have influenced globalization. A total of 41 countries belonging to the European continent have been selected. Furthermore four variables were selected to represent trade affinities; distance, border, colony, and language. These have been selected as they are generally believed to be static and thus should not change over time. Also, this thesis aims to show the separate influence of each trade affinity as other papers usually estimate trade affinities as one collective variable. By the use of a gravity model 9 variables are tested in order to determine their influence on trade flows. This is done through a regression with a log-log equation where the dependent variable is Export and the affinity variables are estimated as dummy variables. The regression is divided into four time periods in order to more easily determine how the trade affinity variables have altered in influence on trade flows in Europe. The first time period represent an average of the time period 1974-1976, the second 1984-1986, the third 1994-1996 and the fourth 2004-2006. The