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Using the Gravity Equation to Differentiate among Alternative Theories of Trade

Robert C. Feenstra, James R. Markusen and Andrew K. Rose
The Canadian Journal of Economics / Revue canadienne d'Economique
Vol. 34, No. 2 (May, 2001), pp. 430-447
Published by: Wiley on behalf of the Canadian Economics Association
Stable URL: http://www.jstor.org/stable/3131862
Page Count: 18
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Using the Gravity Equation to Differentiate among Alternative Theories of Trade
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Abstract

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 are 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 monopolistic-competition model, or a reciprocal-dumping model with free entry. Homogeneous goods are described by a model with national (Armington) product differentiation or by a reciprocal-dumping model with barriers to entry. JEL Classification: F10, F12

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