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Classical or Gravity? Which trade model best matches the UK facts?

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  • Minford, Patrick
  • Xu, Yongdeng

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

  • Minford, Patrick & Xu, Yongdeng, 2017. "Classical or Gravity? Which trade model best matches the UK facts?," CEPR Discussion Papers 12521, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12521
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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.
    2. 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.
    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. Wolfgang F. Stolper & Paul A. Samuelson, 1941. "Protection and Real Wages," Review of Economic Studies, Oxford University Press, vol. 9(1), pages 58-73.
    5. repec:cep:cepbxt:08 is not listed on IDEAS
    6. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Bootstrap; classical trade model; gravity model; indirect inference; UK trade;

    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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