| Using The Gravity Equation To Differentiate Among Alternative Theories Of Trade (1999) | |||||||||||||||
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| One of the most enduring results of empirical international economics is that a simple gravity equation explains a great deal about the data on bilateral trade flows. This is consistent with several theoretical models of trade. In this paper, we argue that alternative theories nevertheless predict subtle differences in key parameter values that should emerge in an estimated gravity equation 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 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 Number: F10, F12 Keywords: homogeneous; empirical; theoretical; simulation; Cournot-Nash; reciprocal dumping. Robert C. Feenstra Profess... | |||||||||||||||
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