Monopolistic competition and trade, revisited: testing the model without testing for gravity

In this paper, I show that the increasing similarity in GDPs among OECD country pairs leads to higher bilateral trade to GDP ratios. This finding provides some support for the prediction of Helpman [J. Jpn. Int. Econ. 1 (1987) 62], whose model explains intra-industry trade that is prevalent among developed countries. I also show that Helpman's prediction is rejected for non-OECD countries, among which intra-industry trade is not critical. This result contrasts with the findings of Hummels-Levinsohn [Q. J. Econ. I 10 (1995) 799], which play an important role in the debate about whether or not New Trade Theory explains international trade patterns at the country level. (c) 2004 Elsevier B.V. All rights reserved.