The Determinants of Bilateral Trade

25 Pages Posted: 9 Jun 2004

See all articles by Huiwen Lai

Huiwen Lai

SAS Institute Inc.

Susan Chun Zhu

Michigan State University - Department of Economics


In this paper, we present a monopolistic competition model that incorporates asymmetric trade barriers and international differences in production costs. The model implies a highly non-linear bilateral trade equation. Estimation of this equation yields parameters for the elasticity of substitution and trade costs that are more reasonable than those found in previous studies. A simulation indicates that trade liberalization will shift trade from rich countries to poor countries and from within continental trading partners with preferential trade agreements to intercontinental trading partners.

JEL Classification: F1

Suggested Citation

Lai, Huiwen and Chun Zhu, Susan, The Determinants of Bilateral Trade. Canadian Journal of Economics, Vol. 37, No. 2, pp. 459-483, May 2004. Available at SSRN:

Huiwen Lai

SAS Institute Inc. ( email )

100 SAS Campus Drive
Cary, NC 27513-2414
United States

Susan Chun Zhu (Contact Author)

Michigan State University - Department of Economics ( email )

214 Marshall Hall
East Lansing, MI 48824
United States
517-355-9647 (Phone)
517-432-1068 (Fax)


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