The Korean Journal of Economic Studies
A Study on the Indeterministic Nature of LQ in Estimating Regional Trades in Applying for more
Haemyoung Ji (Kangwon National University), Tai-Youn Chung (Kangwon National University), HaiLong Ji (Kangwon National University)Year 2016Vol. 64No. 4
In estimating regional trade, LQ index is not proper in applying to morethan 4 regions; first, the indeterministic nature of allocating regional tradesamong regions is shown; second, cross-hauling is not captured in the LQmethod, which is generally induced in actual regional trade; third, demandconstraints are imposed on regional industrial demands for holdingdemand-production equilibrium. Therefore the LQ index calculated based onthe original data, is changed by the equilibrium condition. This is due to thefact that LQ index does not include the distance-decay variables that controlregional trade among regions. Thereby, the internal consistency in a modelcan not be held in LQ model. The estimates by the model may not beapplicable to explain regional trade structures and can not be used as a generalmodel to estimate regional trades. We suggest alternative models such asproduction-demand constraint gravity model and entropy maximization modelfor estimating the trade volume and structure.