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Trade Theory and Trade Facts

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  • Raphael Bergoeing

    (Centro de Economía Aplicada, Universidad de Chile)

  • Timothy J. Kehoe

    (University of Minnesota and Federal Reserve Bank of Minneapolis)

Abstract

This paper quantitatively tests the "new trade theory" based on product di.erentiation, 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 e.ect trade directions and volumes. In addition, we generalize the model to allow changes in relative prices to have large e.ects. 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.

Suggested Citation

  • Raphael Bergoeing & Timothy J. Kehoe, "undated". "Trade Theory and Trade Facts," ILADES-UAH Working Papers inv129, Universidad Alberto Hurtado/School of Economics and Business.
  • Handle: RePEc:ila:ilades:inv129
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    References listed on IDEAS

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    1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 217-235.
    2. Dow, James & da Costa Werlang, Sergio Ribeiro, 1992. "Homothetic preferences," Journal of Mathematical Economics, Elsevier, vol. 21(4), pages 389-394.
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