Bilateral trade volumes, the gravity equation and factor proportions

Andrzej Cieślik

The Journal of International Trade & Economic Development, 2009, vol. 18, issue 1, 37-59

Abstract: The gravity equation has been widely used in studying the determinants of bilateral trade flows. Despite their dubious theoretical foundations gravity models have been extremely successful empirically. All theoretical attempts to provide a formal justification for the gravity equation assume complete specialization in production. This leads to a misleading impression that complete specialization is a necessary condition for deriving the gravity equation. In this paper we demonstrate formally that the gravity equation can be derived also from a variety of incomplete specialization models based on both neoclassical and monopolistic competition assumptions. The common prediction that emerges from these models is that factor proportion variables, along with the country size variables, play a key role in determination of bilateral trade volumes, however, their impact is model specific. The neglect of these variables in empirical studies employing gravity equations derived from complete specialization models might result in estimates that suffer from the omitted variable bias if trading partners differ in terms of their relative factor endowments.

Keywords: bilateral trade; factor proportions; gravity equation; incomplete specialization (search for similar items in EconPapers)
Date: 2009
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/09638190902757400 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:jitecd:v:18:y:2009:i:1:p:37-59

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RJTE20

DOI: 10.1080/09638190902757400

Access Statistics for this article

The Journal of International Trade & Economic Development is currently edited by Pasquale Sgro, David E.A. Giles and Charles van Marrewijk

More articles in The Journal of International Trade & Economic Development from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().