Universal Gravity

Just published in the Journal of Political Economy, Volume 28, Number 2 | February 2020, a new Paper from Treb Allen, Costas Arkolakis, and Yuta Takahashi.

Universal Gravity

Treb Allen

Dartmouth College and National Bureau of Economic Research

Costas Arkolakis

Yale University and National Bureau of Economic Research

Yuta Takahashi

Hitotsubashi University

 

Abstract

We study the theoretical properties and counterfactual predictions of a large class of general equilibrium trade and economic geography models. By combining aggregate factor supply and demand functions with market-clearing conditions, we prove that existence, uniqueness, and—given observed trade flows—the counterfactual predictions of any model within this class depend only on the demand and supply elasticities (“gravity constants”). Using a new “model-implied” instrumental variables approach, we estimate these gravity constants and use these estimates to compute the impact of a trade war between the United States and China.

Full Text available here.