Bilateral trade flows and comparative advantage: does the size matter?

Martin Grancay and Tomáš Dudáš
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Tomáš Dudáš: Faculty of Economics and Entrepreneurship, Pan-European University, Bratislava, Slovakia

Society and Economy, 2019, vol. 41, issue 4, 397-413

Abstract: The paper applies a variant of the gravity model to test whether there is a positive link between the size of trade flows and the extent to which they follow the pattern of comparative advantage. Using UNCTAD’s 2016 trade data for every country in the world, and 255 merchandise items, we show that countries trading more with each other tend to follow the patterns of comparative advantages more than countries with smaller mutual trade flows. While smaller trade flows can be easily influenced by business decisions of individual companies or one-off trade contracts going against trade pattern predictions, this is not the case with larger flows. We also find signs that holding trade volume constant, more distant countries trade less than geographically proximate countries, in line with predictions from comparative advantage. The results are valid for the whole database of all country pairs in world trade, but the goodness of fit increases with the number of items these country pairs trade in. The paper is the first insight into the topic and can be expanded to a higher level of disaggregation and more variables in future research.

Keywords: international trade; gravity model; comparative advantage; trade volume (search for similar items in EconPapers)
JEL-codes: F10 (search for similar items in EconPapers)
Date: 2019
Note: We would like to express our sincere gratitude to the editors and two anonymous referees for their comments and useful suggestions on the previous version of this paper. The help of Jessie Krakosky with English-language editing is also greatly appreciated. As always, any remaining mistakes can be blamed on us.
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