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The Gravity Equation in International Trade: an Explanation

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  • Thomas Chaney

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract

The gravity equation in international trade states bilateral exports are proportional to economic size, and inversely proportional to geographic distance. While the role of size is well understood, that of distance remains mysterious. I offer an explanation for the role of distance: If (i) the distribution of firm sizes is Pareto, (ii) the average squared distance of a firm's exports is an increasing power function of its size, and (iii) a parameter restriction holds, then the distance elasticity of trade is constant for long distances. When the firm size distribution follows Zipf's law, trade is inversely proportional to distance.

Suggested Citation

  • Thomas Chaney, 2018. "The Gravity Equation in International Trade: an Explanation," SciencePo Working papers Main hal-03391935, HAL.
    • Handle: RePEc:hal:spmain:hal-03391935
    DOI: 10.1086/694292
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03391935
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    References listed on IDEAS

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    1. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-481, August.
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