We analyze two main theories of international trade, the Heckscher-Ohlin theory and the Increasing Returns trade theory, by examining whether they can account for the empirical success of the so-called Gravity Equation. Since versions of both models can generate this prediction, we tackle the model identification problem by conditioning bilateral trade relations on factor endownment differences and the share of intra-industry trade, because only for large factor endowment differences does the Heckscher-Ohlin model generate specialization of production and the Gravity Equation, and it predicts inter-, not intra-industry trade. There are three major findings: First, little production is perfectly specialized due to factor endowment differences, making the perfect specialization version of the Heckscher-Ohlin model an unlikely candidate to explain the empirical success of the Gravity Equation. Second, increasing returns are important causes for perfect product specialization and the Gravity Equation, especially among industrialized countries. Third, to the extent that production is not perfectly specialized across countries, we find support for both Heckscher-Ohlin and Increasing Returns models. Based on these findings, we argue that both models explain different components of the international variation of production patterns and trade volumes, with important implications for productivity growth, labor, and macro economics.
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Paper provided by EconWPA in its series International Trade with number
9608001.
Length: 22 pages Date of creation: 20 Aug 1996 Date of revision:
13 Jun 1997 Handle: RePEc:wpa:wuwpit:9608001
Note: Type of Document - Latex (scientific word 2.0); prepared on IBM PC ; to print on HP/PostScript; pages: 22 ; figures: download here or request from authors. Contact details of provider: Web page: http://129.3.20.41
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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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