Augmented Gravity Equation and Incomplete Specialization in Production
Augmented Gravity Equation and Incomplete Specialization in Production

Summary/Abstract: After several decades of research theoretical foundations of gravity equations are still not well understood. Many studies use gravity equations in its basic form that relates bilateral trade flows to GDPs of trading partners and distance between them. However, to improve the fit of regressions empirical gravity equations are often augmented with other characteristics of trading partners. While the gravity equation in its basic form can be derived from several competing theories that assume complete specialization in production, factor proportions augmented gravity equations are still perceived as having less theoretical justification. The main goal of this paper is to derive augmented gravity equations from models that assume incomplete specialization in production and to provide a theoretical justification for the inclusion of factor proportion measures in empirical gravity equations.

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