Trade Theory and Trade Facts
AbstractThis paper quantitatively tests the "new trade theory" based on product differen-tiation, increasing returns, and imperfect competition. We employ a standard model, which allows both changes in the distribution of income among industrialized coun-tries, emphasized by Helpman and Krugman (1985), and nonhomothetic preferences, emphasized by Markusen (1986), to effect trade directions and volumes. In addition, we generalize the model to allow changes in relative prices to have large effects. We test the model by calibrating it to 1990 data and then "backcasting" to 1961 to see what changes in crucial variables between 1961 and 1990 are predicted by the theory. The results show that, although the model is capable of explaining much of the increased concentration of trade among industrialized countries, it is not capable of explaining the enormous increase in the ratio of trade to income. Our analysis suggests that it is policy changes, rather than the elements emphasized in the new trade theory, that have been the most significant determinants of the increase in trade volume.
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Bibliographic InfoPaper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 109.
Date of creation: 2001
Date of revision:
Other versions of this item:
- Raphael Bergoeing & Timothy J. Kehoe, . "Trade Theory and Trade Facts," ILADES-Georgetown University Working Papers inv129, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
- Raphael Bergoeing & Timothy J. Kehoe, 2001. "Trade theory and trade facts," Staff Report 284, Federal Reserve Bank of Minneapolis.
- NEP-ALL-2002-05-03 (All new papers)
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