TY  - JOUR
AU  - Deardorff, Alan V
TI  - Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical    World?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5377
PY  - 1995
Y2  - December 1995
DO  - 10.3386/w5377
UR  - http://www.nber.org/papers/w5377
L1  - http://www.nber.org/papers/w5377.pdf
N1  - Author contact info:
Alan Deardorff
University of Michigan
3314 Weill Hall
735 S. State Street
Ann Arbor, MI 48109-3091
Tel: (734) 764-6817
Fax: (734) 763-9081
E-Mail: alandear@umich.edu
M1  - published as Alan Deardorff. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," in Jeffrey A. Frankel, editor, "The Regionalization of the World Economy" University of Chicago Press (1998)

AB  - This paper derives bilateral trade from two cases of the Heckscher-Ohlin Model, both also representing a variety of other models as well.  First is frictionless trade, in which the absence of all impediments to trade in homogeneous products causes producers and consumers to be indifferent among trading partners.  Resolving this indifference randomly, expected trade flows correspond exactly to the simple frictionless gravity equation if preferences are identical and homothetic, or if demands are uncorrelated with supplies, and they depart from the gravity equation systematically when there are such correlations.  In the second case, countries produce distinct goods, as in the H-O Model with complete specialization or a variety of other models, and preferences are either Cobb-Douglas or CES.  Here trade tends to the standard gravity equation with trade declining in distance, with departures from it that depend on relative transport costs.  Conclusions are, first, that even a simple gravity equation can be derived from standard trade theories, and second, that because the gravity equation characterizes many models, its use to test any of them is suspect.
ER  -