On Gravity, Specialization and Intra-industry Trade

Contrary to the popular belief, specialization is not necessary for gravity equations. This paper shows that the simple gravity equation holds if and only if the market share of an exporting country is constant across all importing countries. Specialization is just one special case satisfying this c...

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Bibliographic Details
Published in:Review of international economics 2011-08, Vol.19 (3), p.494-508
Main Author: Song, E. Young
Format: Article
Language:English
Subjects:
Bilateral economic relations
Competition
Economic theory
Exports
Gravity equations
International trade
Mathematical analysis
Specialization
Studies
Trade flows
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Summary:Contrary to the popular belief, specialization is not necessary for gravity equations. This paper shows that the simple gravity equation holds if and only if the market share of an exporting country is constant across all importing countries. Specialization is just one special case satisfying this condition. The constant‐share condition can hold in a variety of situations where multiple producers compete with a homogeneous good. Further, this paper shows that the ratio of bilateral trade to the product of partner incomes is increasing in the extent of specialization and in the intensity of intra‐industry trade. Since the relationship is not model‐specific, the correlations among these variables do not support any specific model.
ISSN:0965-7576
1467-9396
DOI:10.1111/j.1467-9396.2011.00961.x