We present a gravity model that accounts for multilateral resistance, firm heterogeneity and country-selection into trade, while accommodating asymmetries in trade flows. A new equation for the proportion of exporting firms takes a gravity form: the extensive margin is also affected by multilateral resistance. If all countries reduce their trade frictions, the impact of multilateral resistance is so strong that bilateral trade falls in many cases. This is despite the larger trade elastictiies implied by firm heterogeneity. For isolated bilateral changes in trade frictions, ultilateral resistance effects are small for most countries, but are large when big importers are involved.
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number
440.
Find related papers by JEL classification: F10 - International Economics - - Trade - - - General F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies F14 - International Economics - - Trade - - - Country and Industry Studies of Trade F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
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