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Using the gravity equation to differentiate among alternative theories of trade

By Robert C. Feenstra, Professor James, R. Markusen and Andrew K. Rose


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 or 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 monopolisticcompetition model, or a reciprocal-dumping model with free entry. Homogeneous goods are described by a model with national (Armington) product differentiation or by a reciprocaldumping model with barriers to entry. JEL Classification Number: F10, F12 Keywords: homogeneous; empirical; theoretical; simulation; Cournot-Nash; reciprocal dumping

Year: 2001
DOI identifier: 10.1111/0008-4085.00082
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