Trade theory and trade facts
AbstractThis 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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Bibliographic InfoPaper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 284.
Date of creation: 2001
Date of revision:
Other versions of this item:
- Raphael Bergoeing & Timothy J. Kehoe, 2001. "Trade Theory and Trade Facts," Documentos de Trabajo 109, Centro de Economía Aplicada, Universidad de Chile.
- 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.
- NEP-ALL-2001-05-02 (All new papers)
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