Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/226250
Authors: 
Jareb, Colin
Nigai, Sergey K.
Year of Publication: 
2020
Series/Report no.: 
CESifo Working Paper No. 8548
Abstract: 
Modern quantitative theories of international trade rely on the probabilistic representation of technology and the assumption of the Law of Large Numbers (LLN), which ensures that when the number of traded goods goes to infinity, trade flows can be expressed via a deterministic gravity equation that is log-linear in exporter-specific, importer-specific and bilateral trade cost components. This paper shows that when the number of traded goods is finite, the gravity equation has a structural stochastic component not related to the fundamental gravity forces. It provides a novel explanation of the differences in the goodness of fit of gravity models across different sectors observed in the data. It also suggests that when the LLN does not hold, the welfare gains from trade have a considerable stochastic component and should be characterized via distributions rather than point estimates. We use sectoral trade data and Monte Carlo simulations to develop a procedure with minimal data requirements that allows estimation of intervals for the welfare gains from trade.
Subjects: 
trade gravity
Law of Large Numbers
gains from trade
JEL: 
F10
F60
F14
F17
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.