Testing Trade Theories

Abstract

International trade theory is mainly concerned with determining what goods and services countries will buy and sell in foreign trade, the gains from trade, and how the gains are divided within and among the trading countries. These concerns are of course positive and normative. In theorizing about such matters, we construct abstract models with the presumption that these models will be coherent, logical, interesting, and relevant. While empirical considerations have some bearing on model construction, they obviously become more crucial when a model is to be confronted by observation. At this juncture, what counts most are empirical specification and interpretation of results. These considerations will constitute the primary focus of this paper. Section 1 begins with a brief discussion of the various theoretical models that purport to explain the commodity composition and direction of trade. Sections 2 to 5 contain a review of the major recent developments in the empirical testing of these models. Some suggestions for future research are then given in section 6. Section 7 deals with empirical investigation of the relations between international trade and returns to factors, and section 8 with economic expansion and trade. Some concluding remarks are made in section 9. THEORIES OF THE COMMODITY COMPOSITION AND DIRECTION OF TRADE The classical determination of what goods and services countries will buy and sell in foreign trade is based on the theory of comparative advantage.

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