Working Paper: CEPR ID: DP12521
Authors: Patrick Minford; Yongdeng Xu
Abstract: We examine the empirical evidence bearing on whether UK trade is governed by a Classical model or by a Gravity model, using annual data from 1965 to 2015 and the method of Indirect Inference which has very large power in this application. The Gravity model here differs from the Classical model in assuming imperfect competition and a positive effect of total trade on productivity. We found that the Classical model passed the test comfortably, and that the Gravity model also passed it but at a rather lower level of probability, though as the test power was raised it was rejected. The two models' policy implications are similar.
Keywords: Bootstrap; Indirect Inference; Gravity Model; Classical Trade Model; UK Trade
JEL Codes: F10; F14; F16; F17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| classical model assumptions (E13) | observed trade data (F14) |
| gravity model assumptions (F12) | observed trade data (F14) |
| classical model assumptions (E13) | productivity (O49) |
| gravity model assumptions (F12) | productivity (O49) |
| classical model assumptions (E13) | trade flows (F10) |
| gravity model assumptions (F12) | trade flows (F10) |