Testing the gravity model

Antonio Vicencio
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Antonio Vicencio: RS: GSBE other - not theme-related research, Macro, International & Labour Economics

No 13, Research Memorandum from Maastricht University, Graduate School of Business and Economics (GSBE)

Abstract: Structural gravity is often referred to as the workhorse model in international trade. It is meant to deliver substitution effects through changes in general equilibrium price indexes (the multilateral resistances). I show, however, that the system solving for the multilateral resistances is algebraically equivalent to an iterative proportional fitting procedure (RAS/IPF), which is invariant to changes in price indexes. Multilateral resistances deliver only size effects, without a substitution response across origins. I therefore formalize what the literature refers to as a “potentially devastating critique” of structural gravity: price indexes have no effect on the trade pattern beyond scaling sizes. This is not a flaw of the model but its own prediction, and it aligns with Krugman’s empirical 45-degree rule: changes in real exchange rates are unnecessary to keep trade balanced. This nevertheless compromises counterfactuals and theories that rely on this mechanism.

Keywords: structural gravity; RAS/IPF; multilateral resistance; price invariance; international trade (search for similar items in EconPapers)
JEL-codes: C31 C60 F10 (search for similar items in EconPapers)
Date: 2026-10-29
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Persistent link: https://EconPapers.repec.org/RePEc:unm:umagsb:2026013

DOI: 10.26481/umagsb.2026013

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