Chapter 10 Testing trade theories and predicting trade flows

The major obstacle to the testing of trade theories has been the difficulty of constructing tests that is theoretically sound. The intuitive content of most trade theories is quite simple and straightforward. But empirical tests of the theories are often faulted on the grounds that they test propositions that do not derive rigorously from the theories. The problem seems to lie in the theories themselves, which are seldom stated in forms that are compatible with the real world complexities that empirical research cannot escape. This chapter discusses the problems that arise in testing trade theories independent of the theory being tested. To the extent that many of the specific explanations of trade have a common foundation in the theory of comparative advantage, they also share some of the same empirical complications, and it is useful to look at these before becoming immersed in the particular problems that arise from specific theories. The chapter reviews the empirical tests and implementations of the Ricardian theory, the HeckscherOhlin theory, and the technology theory. The chapter also reviews an assortment of other approaches to trade. These include both recently articulated theories that have not yet been tested, such as the monopolistic competition model, and empirical tests that have been done without benefit of theory, such as the so-called gravity models.