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Using the gravity equation to differentiate among alternative theories of trade

Using the gravity equation to differentiate among alternative theories of trade The simple gravity equation explains a great deal about the data on bilateral trade flows and is consistent with several theoretical models of trade. We argue that alternative theories nevertheless predict subtle differences in key parameter values, depending on whether goods are homogeneous or differentiated and whether or not there are barriers to entry. Our empirical work for differentiated goods delivers results consistent with the theoretical predictions of the monopolistic‐competition model, or a reciprocal‐dumping model with free entry. Homogeneous goods are described by a model with national (Armington) product differentiation or by a reciprocal‐dumping model with barriers to entry. JEL Classification: F10, F12 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Canadian Journal of Economics/Revue Canadienne D'économique Wiley

Using the gravity equation to differentiate among alternative theories of trade

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References (31)

Publisher
Wiley
Copyright
Copyright © 2001 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0008-4085
eISSN
1540-5982
DOI
10.1111/0008-4085.00082
Publisher site
See Article on Publisher Site

Abstract

The simple gravity equation explains a great deal about the data on bilateral trade flows and is consistent with several theoretical models of trade. We argue that alternative theories nevertheless predict subtle differences in key parameter values, depending on whether goods are homogeneous or differentiated and whether or not there are barriers to entry. Our empirical work for differentiated goods delivers results consistent with the theoretical predictions of the monopolistic‐competition model, or a reciprocal‐dumping model with free entry. Homogeneous goods are described by a model with national (Armington) product differentiation or by a reciprocal‐dumping model with barriers to entry. JEL Classification: F10, F12

Journal

Canadian Journal of Economics/Revue Canadienne D'économique – Wiley

Published: May 1, 2001

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