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Using the gravity equation to differentiate among alternative theories of trade

Robert Feenstra (), James Markusen () and Andrew Rose ()

Canadian Journal of Economics, 2001, vol. 34, issue 2, 430-447

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-codes: F10 F12 (search for similar items in EconPapers)
Date: 2001
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Handle: RePEc:cje:issued:v:34:y:2001:i:2:p:430-447