Monopolistic competition and trade: Does the theory carry any empirical 'weight'?

This paper revisits the theory of trade in the presence of product differentiation and economies of scale, and lays out how such a theory can and has been tested for empirically using the gravity equation. Initially, the empirical phenomenon of intra-industry trade is discussed, followed by an outline of the standard monopolistic explanation for intra-industry trade, along with a discussion of how this is embedded in a general equilibrium trade model. Then, the theoretical foundations for the gravity equation are developed, and the empirical strategy for testing the increasing returns/product differentiation story is outlined, indicating that it could be applied to processed food and agricultural trade.