Universal Gravity

Abstract

However, characterization of their theoretical and empirical properties has thus far been primarily focused on specific parametric examples. In this paper, we show there exist a number of theoretical and empirical properties that are universal to all gravity trade models, regardless of their microeconomic foundations. In particular, in any gravity trade model where goods and factor markets clear and trade is balanced, we (1) prove the existence of an equilibrium and provide sufficient conditions for its uniqueness; (2) provide sufficient conditions under which the equilibrium maximizes world income and is Pareto optimal; (3) derive an analytical expression for the elasticity of all trade flows and incomes to all bilateral trade frictions; (4) provide a general method to identify model fundamentals from observed trade ows; and (5) develop two easily implementable estimators of the gravity equation that respect the general equilibrium conditions.