A New Approach to Bilateral Trade Patterns and Balances

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This project implements for the first time on world trade data a model that appropriately predicts bilateral trade in both homogeneous and differentiated goods according to the distinct logic of trade in each. This study examines bilateral exports for 30 industries and 61 countries. This study takes as a maintained assumption that there are two types of goods: the differentiated goods contemplated in the conventional gravity framework and a set of homogeneous goods. The methodological contribution in this study will be the development of a procedure to identify each of the two types of goods and to predict the trade patterns in each. This is undertaken in the context of maximum likelihood estimation. The results will provide a better understanding of the determinants of bilateral trade patterns and balances. An improved model of bilateral trade may also be important for consideration of many problems for which the gravity framework has been a key input. Finally, one output of this project will be the program used to compute the bilateral trade patterns, so that others can easily apply the methodology.