A Survey on the Micro-Foundations of the Trade Gravity Equation

The aim of this paper is to review the state of art regarding the theoretical foundations of gravity equations applied to trade flows. Micro-foundations of the supply side and of the demand side are presented such as new models where a) general equilibrium constraints are taken into account b) heterogeneous firms are introduced b) non homothetic preferences and flexible demand are analysed. In surveying the most recent contributions, this paper sheds light on promising roads of research in particular regarding the lack of micro-foundations of trade costs