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Classical or Gravity? Which Trade Model Best Matches the UK Facts?

Author

Listed:
  • Patrick Minford

    (Cardiff University
    CEPR, Centre for Economic Policy Research)

  • Yongdeng Xu

    (Cardiff University)

Abstract

We examine the empirical evidence bearing on whether UK trade is governed by a Classical model or by a Gravity model, using annual data from 1965 to 2015 and the method of Indirect Inference which has very large power in this application. The Gravity model here differs from the Classical model in assuming imperfect competition and a positive effect of total trade on productivity. We found that the Classical model passed the test comfortably, and that the Gravity model also passed it but at a rather lower level of probability, though as the test power was raised it was rejected. The two models’ policy implications are similar.

Suggested Citation

  • Patrick Minford & Yongdeng Xu, 2018. "Classical or Gravity? Which Trade Model Best Matches the UK Facts?," Open Economies Review, Springer, vol. 29(3), pages 579-611, July.
  • Handle: RePEc:kap:openec:v:29:y:2018:i:3:d:10.1007_s11079-017-9470-z
    DOI: 10.1007/s11079-017-9470-z
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    References listed on IDEAS

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    1. Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick & Wickens, Michael, 2011. "How much nominal rigidity is there in the US economy? Testing a new Keynesian DSGE model using indirect inference," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2078-2104.
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    3. 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.
    4. Patrick Minford & Sakshi Gupta & Vo P.M. Le & Vidya Mahambare & Yongdeng Xu, 2015. "Should Britain Leave the EU?," Books, Edward Elgar Publishing, number 16679.
    5. Wolfgang F. Stolper & Paul A. Samuelson, 1941. "Protection and Real Wages," Review of Economic Studies, Oxford University Press, vol. 9(1), pages 58-73.
    6. Holger Breinlich & Swati Dhingra & Saul Estrin & Hanwei Huang & Gianmarco Ottaviano & Thomas Sampson & John Van Reenen & Jonathan Wadsworth, 2016. "BREXIT 2016: Policy Analysis from the Centre for Economic Performance," CEP Brexit Analysis Papers 08, Centre for Economic Performance, LSE.
    7. Patrick Minford & Jonathan Riley & Eric Nowell, 1997. "Trade, technology and labour markets in the world economy, 1970-90: A computable general equilibrium analysis," Journal of Development Studies, Taylor & Francis Journals, vol. 34(2), pages 1-34.
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    Cited by:

    1. Patrick Minford & Yue Gai & David Meenagh, 2022. "North and South: A Regional Model of the UK," Open Economies Review, Springer, vol. 33(3), pages 565-616, July.
    2. Ben Rosamond, 2020. "European Integration and the Politics of Economic Ideas: Economics, Economists and Market Contestation in the Brexit Debate," Journal of Common Market Studies, Wiley Blackwell, vol. 58(5), pages 1085-1106, September.
    3. Minford, Patrick & Zhu, Zheyi, 2023. "Modelling the effects of Brexit on the British economy," Cardiff Economics Working Papers E2023/3, Cardiff University, Cardiff Business School, Economics Section.
    4. Diana María Cortázar-Gómez & Juan F. Pineda-Guarín, 2019. "Red de comercio departamental en Colombia: Enfoque gravitacional y análisis topológico de redes," Documentos de Trabajo Sobre Economía Regional y Urbana 17742, Banco de la República, Economía Regional.
    5. 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.
    6. Catherine Boulatoff & Talan B. İşcan & Yulia Kotlyarova, 2022. "Does Distance Matter for Trade in Services? The Case of Interprovincial Trade in Canada," Open Economies Review, Springer, vol. 33(1), pages 157-185, February.
    7. Anke Mönnig & Dr. Marc Ingo Wolter, 2020. "Modelling Tariffs in TINFORGE – a Methodology Report," GWS Discussion Paper Series 20-6, GWS - Institute of Economic Structures Research.
    8. Latorre, María C. & Olekseyuk, Zoryana & Yonezawa, Hidemichi & Robinson, Sherman, 2020. "Making sense of Brexit losses: An in-depth review of macroeconomic studies," Economic Modelling, Elsevier, vol. 89(C), pages 72-87.
    9. Minford, Patrick & Xu, Yongdeng & Dong, Xue, 2023. "Testing competing world trade models against the facts of world trade," Journal of International Money and Finance, Elsevier, vol. 138(C).

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    More about this item

    Keywords

    Bootstrap; Indirect inference; Gravity model; Classical trade model; UK trade;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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