Template-type: ReDif-Paper 1.0
Author-Name: Vicencio, Antonio
Author-workplace-name: RS: GSBE other - not theme-related research, Macro, International & Labour Economics
Title: Testing the gravity model
Abstract: Structural gravity is often referred to as the workhorse model in international<br/>trade. It is meant to deliver substitution effects through changes in general<br/>equilibrium price indexes (the multilateral resistances). I show, however, that<br/>the system solving for the multilateral resistances is algebraically equivalent<br/>to an iterative proportional fitting procedure (RAS/IPF), which is invariant<br/>to changes in price indexes. Multilateral resistances deliver only size effects,<br/>without a substitution response across origins. I therefore formalize what the<br/>literature refers to as a “potentially devastating critique” of structural gravity:<br/>price indexes have no effect on the trade pattern beyond scaling sizes. This is<br/>not a flaw of the model but its own prediction, and it aligns with Krugman’s<br/>empirical 45-degree rule: changes in real exchange rates are unnecessary to keep trade balanced. This nevertheless compromises counterfactuals and theories that rely on this mechanism.
Keywords: structural gravity, RAS/IPF, multilateral resistance, price invariance, international trade
Classification-JEL: f10,c31,c60
Series: GSBE Research Memoranda
Creation-Date: 20261029
Number: 013
File-URL: https://cris.maastrichtuniversity.nl/ws/files/326060558/RM26013.pdf
File-Format: application/pdf
File-Size: 685963
Handle: Repec:unm:umagsb:2026013
DOI: 10.26481/umagsb.2026013