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The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence
Jeffrey H. Bergstrand
The Review of Economics and Statistics
Vol. 67, No. 3 (Aug., 1985), pp. 474-481
Published by: The MIT Press
Stable URL: http://www.jstor.org/stable/1925976
Page Count: 8
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Despite the gravity equations' empirical successes in "explaining" trade flows, the model's predictive potential has been inhibited by an absence of strong theoretical foundations. A general equilibrium world trade model is presented from which a gravity equation is derived by making certain assumptions, including perfect international product substitutability. If, however, trade flows are differentiated by origin as evidence suggests, the typical gravity equation is misspecified, omitting certain price variables. The last section presents empirical evidence supporting the notion that the gravity equation is a reduced form from a partial equilibrium subsystem of a general equilibrium model with nationally differentiated products.
The Review of Economics and Statistics © 1985 The MIT Press