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The IUP Journal of Applied Economics
From Trade Deficit in Goods to Trade Surplus in Services: An Eclectic and Extended Gravity Model Approach to Analyzing the Determinants of Service Trade of the United States
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This paper employs an eclectic and extended gravity model of trade to assess the most important determinants of trade in services of the US. The dataset covers the US and its 33 trading partners over the period 1999 to 2013. The estimation method takes into account certain unobservable characteristics of trading partners. The results recommend that distance adversely affects the US real export of services, but has no influence on real import. Also, the higher the volume of trade in goods, the greater outward foreign direct investment, and the bigger trading partners’ market size, the more the exports of services of the US.

 
 
 

While the term ‘Industrial Revolution’ was used to describe the transition of the world economy from agriculture to industry, the transition of the world economy from manufacture to service can be characterized as ‘Service Revolution’. Service sector, also known as the tertiary sector of the economy, comprises a diverse collection of products, known as soft products or intangible activities, such as entertainment, government services, financial services, telecommunication, information technology, healthcare, tourism, and many more. This sector has been lately dominating over the world’s economy. In recent years, the reliance on services has increased substantially in developed economies. According to the WTO (2005), service output accounts for more than 65% of the world’s GDP. That is, the trend in developed countries has been shifting from heavily reliance on manufacturing to a more service-based economy. This transformation was fueled by technological advancements.

 
 
 

Trade Deficit in Goods, Trade Surplus in Services, An Eclectic and Extended Gravity, Analyzing the Determinants, Service Trade of the United States