One of the most successful empirical relationships in international trade is the gravity equation, which relates bilateral trade flows between an origin and destination to bilateral trade frictions, origin characteristics, and destination characteristics. A key decision for researchers in...

There are two principal theories of why countries trade: comparative advantage and increasing returns to scale. Yet there is no empirical work that assesses the relative importance of these two theories in accounting for production structure and trade. We use a framework that nests an increasing...