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Deconstructing Gravity: Trade Costs and Extensive and Intensive Margins

  • Lawless, Martina

    (Central Bank and Financial Services Authority of Ireland)

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 of Ireland in its series Research Technical Papers with number 5/RT/08.

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Length: 29 pages
Date of creation: Aug 2008
Date of revision:
Handle: RePEc:cbi:wpaper:5/rt/08
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  1. Djankov, Simeon & Freund, Caroline & Pham, Cong S., 2006. "Trading on time," Policy Research Working Paper Series 3909, The World Bank.
  2. 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.
  3. Lawless, Martina, 2007. "Firm Export Dynamics and the Geography of Trade," Research Technical Papers 2/RT/07, Central Bank of Ireland.
  4. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2003. "Export versus FDI," Harvard Institute of Economic Research Working Papers 1998, Harvard - Institute of Economic Research.
  5. Andrew B. Bernard & J. Bradford Jensen & Stephen Redding & Peter K. Schott, 2007. "Firms in International Trade," CEP Discussion Papers dp0795, Centre for Economic Performance, LSE.
  6. David L. Hummels & Georg Schaur, 2013. "Time as a Trade Barrier," American Economic Review, American Economic Association, vol. 103(7), pages 2935-59, December.
  7. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting Trade: Firms, Industries, and Export Destinations," NBER Working Papers 10344, National Bureau of Economic Research, Inc.
  8. Samuel S. Kortum, 1997. "Research, Patenting, and Technological Change," Econometrica, Econometric Society, vol. 65(6), pages 1389-1420, November.
  9. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
  10. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
  11. 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.
  12. Anne-Célia Disdier & Keith Head, 2004. "The Puzzling Persistence of the Distance Effect on Bilateral Trade," Development Working Papers 186, Centro Studi Luca d\'Agliano, University of Milano.
  13. 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.
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