Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?

30 Pages Posted: 5 May 2000 Last revised: 24 Sep 2010

See all articles by Alan V. Deardorff

Alan V. Deardorff

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; University of Michigan at Ann Arbor - Department of Economics

Date Written: December 1995

Abstract

This paper derives bilateral trade from two cases of the Heckscher-Ohlin Model, both also representing a variety of other models as well. First is frictionless trade, in which the absence of all impediments to trade in homogeneous products causes producers and consumers to be indifferent among trading partners. Resolving this indifference randomly, expected trade flows correspond exactly to the simple frictionless gravity equation if preferences are identical and homothetic, or if demands are uncorrelated with supplies, and they depart from the gravity equation systematically when there are such correlations. In the second case, countries produce distinct goods, as in the H-O Model with complete specialization or a variety of other models, and preferences are either Cobb-Douglas or CES. Here trade tends to the standard gravity equation with trade declining in distance, with departures from it that depend on relative transport costs. Conclusions are, first, that even a simple gravity equation can be derived from standard trade theories, and second, that because the gravity equation characterizes many models, its use to test any of them is suspect.

Suggested Citation

Deardorff, Alan V., Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World? (December 1995). NBER Working Paper No. w5377. Available at SSRN: https://ssrn.com/abstract=93748

Alan V. Deardorff (Contact Author)

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy ( email )

735 South State Street, Weill Hall
Ann Arbor, MI 48109
United States

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
458 Lorch Hall
Ann Arbor, MI 48109-1220
United States
313-764-6817 (Phone)
313-764-2769 (Fax)

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