Using the gravity equation to differentiate among alternative theories of trade

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Using the gravity equation to differentiate among alternative theories of trade

Author Info

Robert C. Feenstra
James R. Markusen
Andrew K. Rose

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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.

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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 34 (2001)
Issue (Month): 2 (May)
Pages: 430-447
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Handle: RePEc:cje:issued:v:34:y:2001:i:2:p:430-447

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Find related papers by JEL classification:
F10 - International Economics - - Trade - - - General
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies

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