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A Perfect Specialization Model for Gravity Equation in Bilateral Trade based on Production Structure

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  • Majid Einian
  • Farshad Ranjbar Ravasan

Abstract

Although initially originated as a totally empirical relationship to explain the volume of trade between two partners, gravity equation has been the focus of several theoretic models that try to explain it. Specialization models are of great importance in providing a solid theoretic ground for gravity equation in bilateral trade. Some research papers try to improve specialization models by adding imperfect specialization to model, but we believe it is unnecessary complication. We provide a perfect specialization model based on the phenomenon we call tradability, which overcomes the problems with simpler initial. We provide empirical evidence using estimates on panel data of bilateral trade of 40 countries over 10 years that support the theoretical model. The empirical results have implied that tradability is the only reason for deviations of data from basic perfect specialization models.

Suggested Citation

  • Majid Einian & Farshad Ranjbar Ravasan, 2018. "A Perfect Specialization Model for Gravity Equation in Bilateral Trade based on Production Structure," Papers 1803.09935, arXiv.org.
    • Handle: RePEc:arx:papers:1803.09935
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    References listed on IDEAS

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    1. Bohman, Helena & Nilsson, Desirée, 2007. "MARKET OVERLAP AND THE DIRECTION OF EXPORTS - a new approach of assessing the Linder hypothesis," Working Paper Series in Economics and Institutions of Innovation 86, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
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    4. Alan V. Deardorff, 2011. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," World Scientific Book Chapters, in: Robert M Stern (ed.), Comparative Advantage, Growth, And The Gains From Trade And Globalization A Festschrift in Honor of Alan V Deardorff, chapter 24, pages 267-293, World Scientific Publishing Co. Pte. Ltd..
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    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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