Developments in International Trade Theory and Gravity Modelling

  • Somesh K. Mathur
  • Rahul Arora
  • Sarbjit Singh
  • Amrita Roy


This chapter discusses advances in international trade theory and gravity modeling with an explanation of the reasons behind gains from trade. The changing pattern of trade over time has also changed the explanation of the emergence of gains from trade, which provides room for new trade theories. Initial theories of trade, known as traditional trade theories, explain the pattern of trade in terms of comparative advantage. But with the passage of time, the emergence of trade in intermediates and services has provided new reasons for trade and hence has led to the advent of new trade theories. This chapter will explain the different reasons behind international trade.


  1. Amiti, M., & Davis, D. R. (2011). Trade, firms, and wages: Theory and evidence. Review of Economic Studies, 79, 1–36. [Accepted in 2011].CrossRefGoogle Scholar
  2. Anderson, J. E. (1979). A theoretical foundation for the gravity equation. The American Economic Review, 69(1), 106–116.Google Scholar
  3. Anderson, E. J., & Wincoop, V. E. (2003). Gravity with gravitas: A solution to the border puzzle. The American Economic Review, 93, 170–192.CrossRefGoogle Scholar
  4. Anderson, J. E. (2010). The gravity model, National Bureau of Economic Research (Working paper no. 16576). Cambridge, MA.Google Scholar
  5. Antras, P., & Helpman, E. (2004). Global sourcing. Journal of Political Economy, 112(3), 552–580.CrossRefGoogle Scholar
  6. Antras, P., & Helpman, E. (2007). Contractual frictions and global sourcing. CEPR discussion paper no. 6033. London: CEPR.Google Scholar
  7. Arkolakis, C., & Muendler, M. A. (2010/2011). The extensive margin of exporting products. NBER working paper no. 16641. Cambridge, MA: National Bureau of Economic Research.Google Scholar
  8. Arkolakis, C., & Muendler, M. A. (2011). The extensive margin of exporting products: The continuum case (Working paper). Retrieved from
  9. Baier, S., & Bergstrand, J. (2001). The growth of world trade: Tariffs, transport costs, and income similarity. Journal of International Economics, 53(1), 1–27.CrossRefGoogle Scholar
  10. Balassa, B. (1966). Tariff reductions and trade in manufacturers among the industrial countries. The American Economic Review, 56(3), 466–473.Google Scholar
  11. Baldwin, R., & Taglioni, D. (2011). Gravity for dummies and dummies for gravity equations. National Bureau of Economic Research working paper series (No. 12516). NBER.Google Scholar
  12. Bernard, A. B., Eaton, J., Jensen, J. B., & Kortum, S. (2003). Plants and productivity in international trade. The American Economic Review, 93, 1268–1290.CrossRefGoogle Scholar
  13. Bernard, A. B., Redding, S. J., & Schott, P. K. (2007). Comparative advantage and heterogeneous firms. Review of Economic Studies, 74(1), 31–66.Google Scholar
  14. Bernard, A. B., Redding, S. J., & Schott, P. K. (2011). Multiproduct firms and trade liberalization. The Quarterly Journal of Economics, 126(3), 1271–1318.CrossRefGoogle Scholar
  15. Bowen, H. P., Leamer, E. E., & Sveikauskas, L. (1987). Multi-country, multi-factor tests of the factor abundance theory. The American Economic Review, 77(5), 791–809.Google Scholar
  16. Carrere, C. (2006). Revisiting the effects of regional trade agreements on trade flows with proper specification of the gravity model. European Economic Review, 50(2), 223–247.CrossRefGoogle Scholar
  17. Chaney, T. (2008). Distorted gravity: The intensive and extensive margins of international trade. The American Economic Review, 98(4), 1707–1721.CrossRefGoogle Scholar
  18. Davis, D. R., & Weinstein, D. E. (2001). An account of global factor trade. The American Economic Review, 91(5), 1423–1453.CrossRefGoogle Scholar
  19. Deardorff, A. V. (1979). Weak links in the chain of comparative advantage. Journal of International Economics, 9, 197–209.CrossRefGoogle Scholar
  20. Deardorff, A. V. (1984). Testing trade theories and predicting trade flows. In R. W. Jones & P. B. Kenen (Eds.), Handbook of international economics (Vol. I). Amsterdam: North.Google Scholar
  21. Deardorff, A. V. (1985). Comparative advantage and international trade and investment in services. In R. M. Stern (Ed.), Trade and investment in services: Canada/US perspectives. Toronto: Ontario Economic Council.Google Scholar
  22. Deardorff, A. V. (2005). Gains from trade and fragmentation. Research seminar in international economics discussion paper no. 543. Ann Arbor: University of Michigan.Google Scholar
  23. Doing Business Report. (2015). Going beyond efficiency (12th ed.), provided by World Bank Group.
  24. Duval, Y., & Utoktham, C. (2011). Intraregional trade costs in Asia: A primer. Asia-Pacific Development Journal, 18(2), 1–23.CrossRefGoogle Scholar
  25. Eaton, J., & Kortum, S. (2002). Technology, geography, and trade. Econometrica, 70(5), 1741–1779.CrossRefGoogle Scholar
  26. Eckel, C., & Neary, J. P. (2010). Multi-product firms and flexible manufacturing in the global economy. The Review of Economic Studies., 77(1), 188–217.CrossRefGoogle Scholar
  27. Helpman, E., & Krugman, P. (1985). Market structure and foreign trade: Increasing returns, imperfect competition and the international economy. Cambridge: MIT Press.Google Scholar
  28. Helpman, E., Melitz, M. J., & Yeaple, S. R. (2004). Exports versus FDI with heterogeneous firms. The American Economic Review, 94(1), 300–316.CrossRefGoogle Scholar
  29. Helpman, E., Itskhoki, O., & Redding, S. (2011). Trade and labor market outcomes. NBER working paper no. 16662, National Bureau of Economic Research.Google Scholar
  30. Kee, H. L., Nicita, A., & Olarreaga, M. (2009). Estimating trade restrictiveness indices. The Economic Journal., 119, 172–199.CrossRefGoogle Scholar
  31. Krugman, P. (1979). Increasing returns, monopolistic competition, and international trade. Journal of International Economics, 9(4), 469–479.CrossRefGoogle Scholar
  32. Krugman, P. (1980). Scale economies, product differentiation, and the pattern of trade. The American Economic Review, 70(5), 950–959.Google Scholar
  33. Krugman, P., & Venables, T. (1996). Integration, specialization, and adjustment. European Economic Review, 40, 959–968.CrossRefGoogle Scholar
  34. Leamer, E. E. (1980). The Leontief paradox, reconsidered. The Journal of Political Economy, 88(3), 495–503.CrossRefGoogle Scholar
  35. Leamer, E. E., & Levinsohn, J. (1995). International trade theory: The evidence. In G. M. Grossman & K. Rogoff (Eds.), Handbook of international economics (pp. 1339–1396). Amsterdam: Elsevier Science.Google Scholar
  36. Leontief, W. W. (1953). Domestic production and foreign trade: The American capital position re-examined. Proceedings of the American Philosophical Society, 97(4), 332–349. Reprinted in Richard, C., & Harry, G. J. (Eds.) (1968). Readings in international economics. Homewood: Irwin.Google Scholar
  37. Linnemann, H. (1966). An econometric study of international trade flows. Amsterdam: North Holland.Google Scholar
  38. Mayer, T., Melitz, M. J., & Ottaviano, G. I. P. (2014). Market size, competition, and the product mix of exporters. The American Economic Review, 104(2), 495–536.CrossRefGoogle Scholar
  39. McCallum, J. (1995). National borders matter: Canada-U.S. regional trade patterns. The American Economic Review, 85(3), 615–623.Google Scholar
  40. Melitz, M. J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica, 71(6), 1695–1725.CrossRefGoogle Scholar
  41. Melitz, M. J., & Ottaviano, G. I. (2008). Market size, trade, and productivity. Review of Economic Studies, 75, 295–316.CrossRefGoogle Scholar
  42. Moise, E., & Bris, L. F. (2013). Trade costs-what have we learned? OECD trade policy paper no. 150. Retrieved from
  43. Novy, D. (2008). Gravity redux: Measuring international trade costs with panel data, University of Warwick. Retrieved from
  44. Obstfeld, M., & Rogoff, K. (2001). The six major puzzles in international macroeconomics: Is there a common cause? In B. S. Bernanke & K. Rogoff (Eds.), NBER macroeconomics annual 2000 (Vol. 15, pp. 339–412). Cambridge, MA: MIT Press.Google Scholar
  45. Pöyhönen, P. (1963). A tentative model for the volume of trade between countries. Weltwirtschaftliches Archiv, 90(1), 93–100.Google Scholar
  46. Pulliainen, K. (1963). A world trade study: An econometric model of the pattern of the commodity flows of international trade in 1948-60. Ekonomiska Samfundets Tidskrift, 16, 78–91.Google Scholar
  47. Ricardo, D. (1817). On the principles of political economy and taxation. London: John Murray.Google Scholar
  48. Shepherd, B. (2013). The gravity model of international trade: A user guide. ARTNeT Books and Research Reports.Google Scholar
  49. Tinbergen, J. (1962). Shaping the world economy: Suggestions for an international economic policy. Books (Jan Tinbergen). New York: Twentieth Century Fund. Retrieved from
  50. Vanek, J. (1968). The factor proportions theory: The N – Factor case. Kyklos, 21(4), 749–756.CrossRefGoogle Scholar
  51. World Trade Report. (2008). Trade in globalising world. Geneva: WTO.Google Scholar
  52. Zaki, C. (2010). Does trade facilitation matters in bilateral trade? GTAP resources no. 4537.Google Scholar

Copyright information

© The Author(s) 2017

Authors and Affiliations

  • Somesh K. Mathur
    • 1
  • Rahul Arora
    • 2
  • Sarbjit Singh
    • 2
  • Amrita Roy
    • 1
  1. 1.Indian Institute of Technology KanpurKanpurIndia
  2. 2.Consumer Unity & Trust Society (CUTS) InternationalJaipurIndia

Personalised recommendations