Monday, February 4, 2013

Quantum Gravity Trade Models

. Monday, February 4, 2013

Richard Baldwin on the state of the art in empirical international trade economics:

The most empirically successful model in international trade – the so-called gravity equation – is based on “Newtonian” trade theory. The amount of trade between two nations varies with the product of the economic mass of the two nations and inversely with the distance between them. Strange as it may seem to students of Ricardo, Heckscher-Ohlin and the Krugman trade models, these three variables ‘explain’ well over 50% of all variation in bilateral trade flows. No other trade model comes even close. The gravity model, in short, works impeccably at the level of aggregation available to empiricists – until recently. ... 
Standard gravity theory, the distance matters since it affects relative price (distance proxies for all manner of trade costs that raise the price of imported goods relative to local goods) and the destination GDP matters since it effects total expenditure on all goods in the market. In the new ‘quantum’ gravity theory (expounded by, for example Melitz, Helpman and Rubinstein, or Chaney) a key new feature is the impact on firms’ decision to enter a market or not. Importantly, this decision depends upon the fixed cost of establishing a beachhead in a new market – what I have in the distant past called, ‘beachhead costs.
Plenty more here. For political scientists these "beachhead costs" might contain some of the most interesting features of trade regimes. These costs may be natural or artificial (i.e. political), and they may be strengthened or lessened by governments. While trade is not my primary area of expertise, I know of no applications of quantum gravity models in political science despite the prevalence of "Newtonian" gravity models. (If I am incorrect about this I'm sure I'll be corrected in the comments.) This could be a rewarding avenue for future IPE research, and it is a nice illustration of the importance of structure interacting with agency to condition outcomes as discussed in Oatley's recent post on the reductionist gamble.


LFC said...

R Baldwin:
"The amount of trade between two nations varies with the product of the economic mass of the two nations and inversely with the distance between them."

I understand the second part of this sentence but not the first: trade varies "with the product of the economic mass of the two nations..."
Sounds like it's a reference to multiplying GDPs together but I'm probably missing something. Anyway, to someone not v familiar w empirical models of trade, the sentence is not too helpful. Then he goes on to refer to "three variables" but it sounds like there are only two here: economic mass and distance. Again I'm prob. missing something.

Kindred Winecoff said...

The first part refers to GDP or some other measure of the size of national economies. The three variables would then be: GDP of country 'A', GDP of country 'B', and distance between them.

LFC said...

Got it, thanks.

(Btw, unrelated: thks for tweeting my 'reason of state' post.)

Quantum Gravity Trade Models




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