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Trade theory and trade facts

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Author Info
Raphael Bergoeing
Timothy J. Kehoe

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Abstract

This paper quantitatively tests the “new trade theory” based on product differentiation, increasing returns, and imperfect competition. We employ a standard model, which allows both changes in the distribution of income among industrialized countries, 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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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 284.

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Date of creation: 2001
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Handle: RePEc:fip:fedmsr:284

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Keywords: Trade ; Product differentiation;

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This paper has been announced in the following NEP Reports: 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.:
  1. Trefler, Daniel, 1993. "International Factor Price Differences: Leontief Was Right!," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 961-87, December. [Downloadable!] (restricted)
  2. Hummels, David & Levinsohn, James, 1995. "Monopolistic Competition and International Trade: Reconsidering the Evidence," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 799-836, August. [Downloadable!] (restricted)
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  3. Helpman, Elhanan, 1981. "International trade in the presence of product differentiation, economies of scale and monopolistic competition : A Chamberlin-Heckscher-Ohlin approach," Journal of International Economics, Elsevier, vol. 11(3), pages 305-340, August. [Downloadable!] (restricted)
  4. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Blackwell Publishing, vol. 43(2), pages 217-35, June. [Downloadable!] (restricted)
  5. Hunter, Linda, 1991. "The contribution of nonhomothetic preferences to trade," Journal of International Economics, Elsevier, vol. 30(3-4), pages 345-358, May. [Downloadable!] (restricted)
  6. Echevarria, Cristina, 1997. "Changes in Sectoral Composition Associated with Economic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 431-52, May.
  7. Robert C. Feenstra, . "Integration Of Trade And Disintegration Of Production In The Global Economy," Department of Economics 98-06, California Davis - Department of Economics. [Downloadable!]
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  8. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-85, March. [Downloadable!] (restricted)
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  9. Deardorff, Alan V., 1984. "Testing trade theories and predicting trade flows," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 10, pages 467-517 Elsevier. [Downloadable!] (restricted)
  10. Helpman, Elhanan, 1987. "Imperfect competition and international trade: Evidence from fourteen industrial countries," Journal of the Japanese and International Economies, Elsevier, vol. 1(1), pages 62-81, March. [Downloadable!] (restricted)
  11. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  12. Markusen, James R, 1986. "Explaining the Volume of Trade: An Eclectic Approach," American Economic Review, American Economic Association, vol. 76(5), pages 1002-11, December. [Downloadable!] (restricted)
  13. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, 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.)

  1. Timothy J. Kehoe, 2003. "An Evaluation of the Performance of Applied General Equilibrium Models of the Impact of NAFTA," Levine's Bibliography 506439000000000525, UCLA Department of Economics. [Downloadable!]
    Other versions:
  2. Robert Dekle & Hyeok Jeong & Heajin Ryoo, 2006. "A Re-examination of the Exchange Rate Disconnect Puzzle: Evidence from Japanese Firm Level Data," IEPR Working Papers 06.46, Institute of Economic Policy Research (IEPR). [Downloadable!]
  3. Raphael Bergoeing & Timothy J. Kehoe & Vanessa Strauss-Kahn & Kei-Mu Yi, 2004. "Why is manufacturing trade rising even as manufacturing output is falling?," Working Papers 04-4, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  4. Cuñat, Alejandro & Maffezzoli, Marco, 2005. "Can Comparative Advantage Explain the Growth of US Trade?," CEPR Discussion Papers 5348, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Alexandre Cunha & Arilton Teixeira, 2004. "The Impacts of Trade Blocks and Tax Reforms on the Brazilian Economy," Revista Brasileira de Economia, Graduate School of Economics, Getulio Vargas Foundation (Brazil), vol. 58(3), April. [Downloadable!]
    Other versions:
  6. Manoj Atolia & Yoshinori Kurokawa, 2008. "Variety Trade and Skill Premium in a Calibrated General Equilibrium Model: The Case of Mexico," Working Papers wp2008_11_03, Department of Economics, Florida State University. [Downloadable!]
    Other versions:
  7. Benjamin Bridgman, . "Energy Prices and the Expansion of World Trade," Departmental Working Papers 2003-14, Department of Economics, Louisiana State University. [Downloadable!]
    Other versions:
  8. Tianshu Chu & Thomas J. Prusa, 2004. "The Reasons for and the Impact of Antidumping Protection: The Case of People's Republic of China," Economics Study Area Working Papers 69, East-West Center, Economics Study Area. [Downloadable!]
  9. Kei-Mu Yi, 2000. "Can vertical specialization explain the growth of world trade?," Staff Reports 96, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
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