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A Perfect Specialization Model for Gravity Equation in Bilateral Trade based on Production Structure

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  • Einian, Majid
  • Ravasan, Farshad

Abstract

Specialization models are important in providing a solid theoretical ground for gravity equation in bilateral trade. Some research papers try to improve specialization models by adding imperfect specialization to them, but we believe it is unnecessary complication. We provide a perfect specialization model based on the phenomenon that we call tradability, which overcomes the problems with simpler models. We provide empirical evidence using estimations on panel data of bilateral trade of 40 countries over 10 years that support the theoretical model.

Suggested Citation

  • Einian, Majid & Ravasan, Farshad, 2016. "A Perfect Specialization Model for Gravity Equation in Bilateral Trade based on Production Structure," MPRA Paper 72734, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:72734
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    References listed on IDEAS

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    1. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    2. Alan V. Deardorff, 2011. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," World Scientific Book Chapters, in: Robert M Stern (ed.), Comparative Advantage, Growth, And The Gains From Trade And Globalization A Festschrift in Honor of Alan V Deardorff, chapter 24, pages 267-293, World Scientific Publishing Co. Pte. Ltd..
    3. Ricardo, David, 1821. "On the Principles of Political Economy and Taxation," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, edition 3, number ricardo1821.
    4. Feenstra, Robert & Markusen, James R. & Rose, Andrew K, 1998. "Understanding the Home Market Effect and the Gravity Equation: The Role of Differentiating Goods," CEPR Discussion Papers 2035, C.E.P.R. Discussion Papers.
    5. Simon J. Evenett & Wolfgang Keller, 2002. "On Theories Explaining the Success of the Gravity Equation," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 281-316, April.
    6. Bohman, Helena & Nilsson, Desirée, 2007. "MARKET OVERLAP AND THE DIRECTION OF EXPORTS - a new approach of assessing the Linder hypothesis," Working Paper Series in Economics and Institutions of Innovation 86, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    7. Bergstrand, Jeffrey H, 1989. "The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 143-153, February.
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    More about this item

    Keywords

    bilateral trade; gravity equation; perfect specialization; tradability;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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