THE VOLUME OF TRADE IN DIFFERENTIATED INTERMEDIATE GOODS - THEORY ANDEVIDENCE

The paper develops a model of trade in differentiated intermediate goo ds, and shows how the structure of the importing country's production will influence gross bilateral import volumes. A regression equation d irectly implied by the model is estimated using disaggregated bilatera l trade data for the OECD countries in 1985. The data reject the model . A more general model suggested by the theory establishes strong link s between a country's factor endowments and its gross trade volume. Th is model is dominated statistically by a fixed effects model, and does not substantially alter the conclusions of earlier empirical studies about openness to trade in manufactured goods.