Alternative Hypotheses and the Volume of Trade: The Gravity Equation and the Extent of Specialization
Public Policy Institute of California
David L. Hummels
Purdue University - Department of Economics; National Bureau of Economic Research (NBER)
Canadian Journal of Economics, Vol. 37, No. 1, pp. 199-218, February 2004
We examine why the gravity equation works and the implications for its use. First, we demonstrate that the gravity equation as a statistical relationship can be generated from a model with incomplete specialization and trade costs. Second, we analyse the predominance of zero bilateral trade values as a 'puzzle' broadly inconsistent with the complete specialization models typically used to derive the gravity equation, but consistent with the alternative hypothesis of incomplete specialization. Third, we demonstrate that the explanation for why the gravity equation works has considerable relevance for how the gravity equation is interpreted and used and how we view bilateral trade.
Number of Pages in PDF File: 25Accepted Paper Series
Date posted: March 17, 2004
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.532 seconds