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Universal Gravity

Treb Allen, Costas Arkolakis () and Yuta Takahashi

Journal of Political Economy, 2020, vol. 128, issue 2, 393 - 433

Abstract: We study the theoretical properties and counterfactual predictions of a large class of general equilibrium trade and economic geography models. By combining aggregate factor supply and demand functions with market-clearing conditions, we prove that existence, uniqueness, and—given observed trade flows—the counterfactual predictions of any model within this class depend only on the demand and supply elasticities (“gravity constants”). Using a new “model-implied” instrumental variables approach, we estimate these gravity constants and use these estimates to compute the impact of a trade war between the United States and China.

Date: 2020
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Working Paper: Universal Gravity (2015) Downloads
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