Determinants of the exports of Hungary: Trade theory and the gravity model

Abstract

The end of the Communist regime brought about great changes in the economies of Central and Eastern Europe; the restructuring of foreign trade was one of the biggest challenges for these countries. After the transition period, Hungary became a very open country, with its trade to GDP ratio around 1.5, while trading with more than 190 countries. The aim of this paper is to analyse the determinants of exports between 1993-2014, with an emphasis on the impact of factor endowments. According to our results, economic size, common border, and free trade agreements had a statistically significant positive effect on exports, while the coefficient of distance had the expected negative sign. We measured factor endowments with several approaches and our results show that exports change in line with the Linder hypothesis, i.e. Hungary tends to trade more with countries having similar factor endowments, and thus its trade is based on differentiated products.