EXPLAINING THE VOLUME OF NORTH-SOUTH TRADE

The purpose is to advance and "test' the hypotheses that the high volume of North-North trade relative to North-South trade is caused: by higher protection levels in the South; and by the low GNP in the South relative to the North. Both hypotheses are consistent and complementary with explanations based on monopolistic competition models. Section III presents counterfactual experiments using a numerical general equilibrium model. Three experiments are performed: global free trade; increasing the endowment of the South to give it a GNP roughly equal to that of the North; and global free trade and an increase in the South's endowment together. The results of these simulations strongly support our hypotheses. These results most certainly do not prove that increasing returns and product differentiation are not important determinants of trade. They do however cast considerable doubt on the suggestion that the observed volumes of trade are inconsistent with competitive trade theory. -from Authors