Classical or Gravity? Which Trade Model Best Matches the UK Facts?

39 Pages Posted: 2 Jan 2018

See all articles by Patrick Minford

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Yongdeng Xu

Cardiff University - Cardiff Business School - Economics Section

Date Written: December 2017

Abstract

We examine the empirical evidence bearing on whether UK trade is governed by a Classical model or by a Gravity model, using annual data from 1965 to 2015 and the method of Indirect Inference which has very large power in this application. The Gravity model here differs from the Classical model in assuming imperfect competition and a positive effect of total trade on productivity. We found that the Classical model passed the test comfortably, and that the Gravity model also passed it but at a rather lower level of probability, though as the test power was raised it was rejected. The two models' policy implications are similar.

Keywords: Bootstrap, classical trade model, gravity model, indirect inference, UK trade

JEL Classification: F10, F14, F16, F17

Suggested Citation

Minford, Patrick and Xu, Yongdeng, Classical or Gravity? Which Trade Model Best Matches the UK Facts? (December 2017). CEPR Discussion Paper No. DP12521. Available at SSRN: https://ssrn.com/abstract=3095571

Patrick Minford (Contact Author)

Cardiff University Business School ( email )

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Cardiff, CF10 3EU
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+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Yongdeng Xu

Cardiff University - Cardiff Business School - Economics Section ( email )

Cardiff CF10 3EU
United Kingdom

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