Trade Theory and Trade FactsRaphael Bergoeing and Timothy Kehoe ILADES-UAH Working Papers from Universidad Alberto Hurtado/School of Economics and Business 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. New Economics Papers: this item is included in nep-his Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ila:ilades:inv129 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in ILADES-UAH Working Papers from Universidad Alberto Hurtado/School of Economics and Business Contact information at EDIRC. |
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