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Distorted Gravity: The Intensive and Extensive Margins of International Trade

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  • Thomas Chaney

Abstract

By considering a model with identical firms, Krugman (1980) predicts that a higher elasticity of substitution between goods magnifies the impact of trade barriers on trade flows. In this paper, I introduce firm heterogeneity in a simple model of international trade. I prove that the extensive margin and the intensive margin are affected by the elasticity of substitution in exact opposite directions. When the distribution of productivity across firms is Pareto, the predictions of the Krugman model with representative firms are overturned: the impact of trade barriers on trade flows is dampened by the elasticity of substitution, and not magnified. (JEL F12, F13)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.4.1707
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File URL: http://www.aeaweb.org/aer/data/sept08/20050798_app.pdf
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 4 (September)
Pages: 1707-21

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:4:p:1707-21

Note: DOI: 10.1257/aer.98.4.1707
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  1. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  2. Costas Arkolakis, 2007. "Market Access Costs and the New Consumers Margin in International Trade," 2007 Meeting Papers 234, Society for Economic Dynamics.
  3. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Boston College Working Papers in Economics 593, Boston College Department of Economics.
  4. Andersson, Martin, 2007. "Entry costs and adjustments on the extensive margin - an analysis of how familiarity breeds exports," Working Paper Series in Economics and Institutions of Innovation 81, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  5. Matthieu Crozet & Pamina Koenig, 2008. "Structural Gravity Equations with Intensive and Extensive Margins," Working Papers 2008-30, CEPII research center.
  6. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  7. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
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