The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade

A general equilibrium model of world trade with two differentiated-product industries and two factors is developed to illustrate how the gravity equation, including exporter and importer populations as well as incomes, "fits in" with the Heckscher-Ohlin model of inter-industry trade and the Helpman-Krugman-Markusen models of intra-industry trade. The study extends the microeconomic foundations for a generalized gravity equation in Bergstrand (1985) to incorporate relative factor-endowment differences and non-homethetic tastes. Empirical estimates of this generalized gravity equation for single-digit SITC industry groups yield plausible inferences of their capital-labor intensities.