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On Gravity, Specialization and Intra‐industry Trade
Author(s) -
Song E. Young
Publication year - 2011
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2011.00961.x
Subject(s) - homogeneous , economics , constant (computer programming) , variety (cybernetics) , gravity equation , gravity model of trade , product (mathematics) , simple (philosophy) , market share , intra industry trade , bilateral trade , econometrics , international trade , microeconomics , trade barrier , mathematics , computer science , statistics , philosophy , geometry , epistemology , finance , combinatorics , law , political science , china , programming language
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.