Examining the accuracy of the monopolistic competition theory's predictions for import volumes, we assess whether this theory accounts for the empirical success of the gravity equation. Since certain factor-endowment based theories have the same prediction for import volumes, we employ resampling techniques to address this model identification problem. We use extraneous information on the allocation of factor endowments in a given sample to identify which model is driving trade flows. We find that the accuracy of the monopolistic competition theory's prediction improves in samples where the factor endowment allocations generate a higher share of differentiated goods trade. By an analogous criterion, the Heckscher-Ohlin models make a much less accurate prediction. We conclude that the monopolistic competition theory is more likely to account for the gravity equation's success, especially in explaining trade among industrial nations.
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Paper provided by Wisconsin Madison - Social Systems in its series Working papers with number
9713.
Find related papers by JEL classification: F11 - International Economics - - Trade - - - Neoclassical Models of Trade F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Leamer, Edward E. & Levinsohn, James, 1995.
"International trade theory: The evidence,"
Handbook of International Economics,
in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 26, pages 1339-1394
Elsevier.
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