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Testing competing world trade models against the facts of world trade

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We carry out an indirect inference test of two versions of a computable general equilibrium (CGE) model of world trade. One of these, the classical model, is well-known as the Heckscher-Ohlin-Samuelson model of world trade, in which countries trade homogeneous products in world markets and produce according to their comparative advantage as determined by their resource endowments. The other, the gravity model, assumes products are differentiated by geographical origin, so that trade is determined largely by demand and relative prices differing according to distance; trade in turn affects productivity through technology transfer. These two CGE models of world trade behave in very different ways and predict quite different effects for trade policy, underlining the importance of discovering which best fits the facts of international trade. Our findings here are that the classical model fits these facts fairly well in general, while the gravity model is largely strongly rejected by them.

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  • Minford, Patrick & Xu, Yongdeng & Dong, Xue, 2021. "Testing competing world trade models against the facts of world trade," Cardiff Economics Working Papers E2021/20, Cardiff University, Cardiff Business School, Economics Section.
    • Handle: RePEc:cdf:wpaper:2021/20
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    2. Gang Chen & Xue Dong & Patrick Minford & Guanhua Qiu & Yongdeng Xu & Zequn Xu, 2022. "Computable General Equilibrium Models of Trade in the Modern Trade Policy Debate," Open Economies Review, Springer, vol. 33(2), pages 271-309, April.
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    15. Vo Le & David Meenagh & Patrick Minford & Michael Wickens & Yongdeng Xu, 2016. "Testing Macro Models by Indirect Inference: A Survey for Users," Open Economies Review, Springer, vol. 27(1), pages 1-38, February.
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    2. Minford, Patrick & Xu, Yongdeng, 2024. "Indirect Inference- a methodological essay on its role and applications," Cardiff Economics Working Papers E2024/1, Cardiff University, Cardiff Business School, Economics Section.

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    Keywords

    Bootstrap; indirect inference; gravity model; classical trade model; trade;
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