Nepal’s Trade Potential: An Empirical Assessment Using the Gravity Approach

Abstract

The gravity framework has long served as a central tool in international trade analysis, linking bilateral trade volumes to the relative economic size of countries and the geographical distance separating them. Drawing on this theoretical foundation, the present study evaluates Nepal’s potential trade performance with its major commercial partners. A modified gravity specification is applied to panel data covering 46 trading partners. The model incorporates eight key explanatory variables, while Nepal’s own gross domestic product (GDP) and per capita income are also included to capture domestic economic capacity.The empirical investigation relies on annual data spanning 2001–2022, obtained from the International Monetary Fund’s Direction of Trade Statistics (DOTS). The final dataset consists of 924 observations across ten variables. Estimation results indicate that the economic scale of partner countries exerts a positive and statistically meaningful influence on Nepal’s bilateral trade flows. Conversely, physical distance between Nepal and its trading counterparts acts as a significant constraint, reducing trade intensity.