A Perfect Specialization Model for Gravity Equation in Bilateral Trade based on Production Structure

Specialization models are important in providing a solid theoretical ground for gravity equation in bilateral trade. Some research papers try to improve specialization models by adding imperfect specialization to them, but we believe it is unnecessary complication. We provide a perfect specialization model based on the phenomenon that we call tradability, which overcomes the problems with simpler models. We provide empirical evidence using estimations on panel data of bilateral trade of 40 countries over 10 years that support the theoretical model.