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| Our derivation of the gravity equation from the monopolistic competition model used the following logic: (i) Each country produces many products. (ii) Each country demands all of the products that every other country produces. (iii) Thus, large countries demand more imports from other countries. The gravity equation relationship does not hold in the Heckscher-Ohlin model. Explain how the logic of the gravity equation breaks down in the Heckscher-Ohlin model: that is, which of the statements just listed is no longer true in the Heckscher Ohlin model? |
