Trade flows and comparative advantage for Iran

This thesis has three objectives. First, the thesis evaluates the alternative indirect methods of measuring or identifying Iran's comparative advantage through revealed trade performance. Secondly, it seeks to identify Iran's export potential by considering similar and comparable economies. Thirdly, it explores the potential volume and direction of fran's trade flows by using a gravity model. The thesis primarily provides a review and an evaluation of the theory and empirical robustness of the law of comparative advantage. The application of indirect methods proves to be useful in identifying Iran's activities of comparative advantage. Alternative indices of revealed trade performance are used to measure Iran's revealed comparative advantage (RCA) for non-oil exports. The results based on these three measurements are found to be consistent, and also show that Iran has export characteristics which reflect the endowments of this natural-resourceabundant developing country. Iran's exports tend to lie in natural-resource-intensive goods, mostly agricultural products, and generally labour-intensive products. Relatively weak export performance is identified in capital-intensive and humancapital- intensive products. Upon determining the commodities in which Iran has a revealed comparative advantage, the thesis investigates how Iran's export composition may be expected to evolve in future. Export similarity indices and the revealed export performance of comparator countries are used to identify the scope for intra- and inter-industry export diversification. Finally, a gravity model is estimated in order to compare the actual and potential volume and direction of Iran's trade. The results show that Iran's current actual trade is larger than that predicted by the model. The current 'over-trade' figures arise from fran's oil exports to a few industrial countries. Actual trade with the developing countries as a whole is by contrast lower than predicted.