The Gravity Equation in International Trade: An Explanation
AbstractThe gravity equation in international trade is one of the most robust empirical finding in economics: bilateral trade between two countries is proportional to size, measured by GDP, and inversely proportional to the geographic distance between them. While the role of size is well understood, the role of distance remains a mystery. I propose the first explanation for the gravity equation in international trade, based on the emergence of a stable network of input-output linkages between firms. Over time, a firm acquires more suppliers and customers, which tend to be further away. I show that if, as observed empirically, (i) the distribution of firm sizes is well approximated by Zipf’s law and (ii) larger firms export over longer distances on average, then aggregate trade is inversely proportional to distance. Data on firm level, sectoral, and aggregate trade support further predictions of the model.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9613.
Date of creation: Aug 2013
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Other versions of this item:
- Thomas Chaney, 2013. "The Gravity Equation in International Trade: An Explanation," NBER Working Papers 19285, National Bureau of Economic Research, Inc.
- F1 - International Economics - - Trade
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-28 (All new papers)
- NEP-GEO-2013-09-28 (Economic Geography)
- NEP-INT-2013-09-28 (International Trade)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Head, Keith & Mayer, Thierry, 2013.
"What separates us? Sources of resistance to globalization,"
CEPR Discussion Papers
9614, C.E.P.R. Discussion Papers.
- Keith Head & Thierry Mayer, 2013. "What separates us? Sources of resistance to globalization," Canadian Journal of Economics, Canadian Economics Association, vol. 46(4), pages 1196-1231, November.
- Keith Head & Thierry Mayer, 2013. "What Separates Us? Sources of Resistance to Globalization," Working Papers 2013-26, CEPII research center.
- Nakhoda, Aadil, 2013. "The impact of the exports of BRIC countries plus Turkey on the exports of Pakistan," MPRA Paper 52477, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.