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Deconstructing Gravity: Trade Costs and Extensive and Intensive Margins

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Author Info
Lawless, Martina (Central Bank and Financial Services Authority of Ireland)

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Abstract

One of the most robust empirical results in international economics is the existence of a negative relationship between trade flows and distance. More recent research on exporting activity at the firm level has established an apparently equally robust result---few firms export, and exporting firms do not sell in all possible markets. This paper uses data on US exports across 156 countries to decompose exports to each market into the number of firms exporting (the extensive margin) and average export sales per firm (the intensive margin). We show how the effects of distance and a range of other proxies for trade costs have different impacts on the two margins. We find that distance has a negative effect on both margins, but the magnitude of the coefficient is considerably larger and more significant for the extensive margin. Most of the variables capturing language, internal geography, infrastructure and import cost barriers work solely through the extensive margin. We show that these results are consistent with the predictions of a Melitz-style model of trade with heterogeneous firm productivity and fixed costs.

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Paper provided by Central Bank & Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers with number 5/RT/08.

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Length: 29 pages
Date of creation: Aug 2008
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Handle: RePEc:cbi:wpaper:5/rt/08

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Find related papers by JEL classification:
F10 - International Economics - - Trade - - - General
F14 - International Economics - - Trade - - - Country and Industry Studies of Trade

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  1. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2007. "Firms in International Trade," NBER Working Papers 13054, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Samuel S. Kortum, 1997. "Research, Patenting, and Technological Change," Econometrica, Econometric Society, vol. 65(6), pages 1389-1420, November.
  3. Hummels, David, 2001. "Time as a Trade Barrier," GTAP Working Papers 1152, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University. [Downloadable!]
  4. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting trade: firms, industries, and export destinations," Staff Report 332, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  5. Lawless, Martina, 2007. "Firm Export Dynamics and the Geography of Trade," MPRA Paper 10008, University Library of Munich, Germany. [Downloadable!]
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  6. Djankov, Simeon & Freund, Caroline & Pham, Cong S., 2006. "Trading on time," Policy Research Working Paper Series 3909, The World Bank. [Downloadable!]
  7. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September. [Downloadable!]
  8. Helpman, Elhanan & Melitz, Marc J & Yeaple, Stephen R, 2003. "Export versus FDI," CEPR Discussion Papers 3741, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March. [Downloadable!]
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  10. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September. [Downloadable!] (restricted)
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  12. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August. [Downloadable!] (restricted)
  13. Anne-Célia Disdier & Keith Head, 2008. "The Puzzling Persistence of the Distance Effect on Bilateral Trade," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 37-48, 09. [Downloadable!] (restricted)
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