1 Bilateral Trade Flows and Income- Distribution Similarity By

This paper proposes three new measures of income-distribution similarity. The new measures are used to evaluate the effect of demand overlaps on bilateral trade flows in the context of the gravity model of trade. National income distributions will be used to calculate the income similarity indices that measure how much each country pair overlaps in terms of their income distribution and population. A higher demand overlap will imply a more similar demand structure and therefore more trade. The implications are different for different types of goods. With these new income-distribution similarity indices we aim to test some of the predictions made in recently developed models concerning bilateral trade and also inter and intra-industry trade. JEL classification: F10, F14, D3