Abstract
Abstract. We examine why the gravity equation works and the implications for its use. First, we demonstrate that the gravity equation as a statistical relationship can be generated from a model with incomplete specialization and trade costs. Second, we analyse the predominance of zero bilateral trade values as a ‘puzzle’ broadly inconsistent with the complete specialization models typically used to derive the gravity equation, but consistent with the alternative hypothesis of incomplete specialization. Third, we demonstrate that the explanation for why the gravity equation works has considerable relevance for how the gravity equation is interpreted and used and how we view bilateral trade.
Keywords
Gravity equationGravity model of tradeRelevance (law)Structural equation modelingBilateral tradeEconomicsEconometricsMathematicsStatisticsInternational tradeGeography
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Publication Info
- Year
- 2004
- Type
- article
- Volume
- 37
- Issue
- 1
- Pages
- 199-218
- Citations
- 218
- Access
- Closed
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Cite This
Jon D. Haveman,
David Hummels
(2004).
Alternative hypotheses and the volume of trade: the gravity equation and the extent of specialization.
Canadian Journal of Economics/Revue canadienne d économique
, 37
(1)
, 199-218.
https://doi.org/10.1111/j.0008-4085.2004.011_1.x
Identifiers
- DOI
- 10.1111/j.0008-4085.2004.011_1.x