This paper quantitatively tests the “new trade theory” based on product differentiation, increasing returns,
and imperfect competition. We employ a model that allows both changes in the shares of income among
industrialized countries, emphasized by Helpman and Krugman (1985), and nonhomothetic preferences,
emphasized by Markusen (1986), to affect trade volumes and directions. In addition, we generalize the
model to allow changes in relative prices to have large effects. We test the model by calibrating it to
1990 data and then “backcasting” to 1961 to see what changes in crucial variables between 1961 and
1990 are predicted by the theory. The results show that, although the model is capable of explaining
much of the increased concentration of trade among industrialized countries, it is not capable of
explaining the enormous increase in the ratio of trade to income.