This paper examines two main theories of international trade—Heckscher-Ohlin (H-O) and Increasing Returns to Scale (IRS)—to determine whether they can explain the empirical success of the Gravity Equation. The authors address the model identification problem by conditioning bilateral trade relations on factor endowment differences and the share of intra-industry trade. They find that: 1. Perfect specialization due to factor endowment differences is not a major factor in explaining the success of the Gravity Equation. 2. Increasing Returns to Scale (IRS) are important causes for perfect product specialization and the Gravity Equation, especially among industrialized countries. 3. Both H-O and IRS models explain the difference components of international variation in production patterns and trade volumes. The paper also assesses the empirical relevance of IRS-based trade models, highlighting their implications for productivity growth, labor, and macroeconomics. The findings suggest that the volume of international trade is determined by the extent of product specialization, which is influenced by both factor proportions differences and IRS.This paper examines two main theories of international trade—Heckscher-Ohlin (H-O) and Increasing Returns to Scale (IRS)—to determine whether they can explain the empirical success of the Gravity Equation. The authors address the model identification problem by conditioning bilateral trade relations on factor endowment differences and the share of intra-industry trade. They find that: 1. Perfect specialization due to factor endowment differences is not a major factor in explaining the success of the Gravity Equation. 2. Increasing Returns to Scale (IRS) are important causes for perfect product specialization and the Gravity Equation, especially among industrialized countries. 3. Both H-O and IRS models explain the difference components of international variation in production patterns and trade volumes. The paper also assesses the empirical relevance of IRS-based trade models, highlighting their implications for productivity growth, labor, and macroeconomics. The findings suggest that the volume of international trade is determined by the extent of product specialization, which is influenced by both factor proportions differences and IRS.