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A Note on Trade Costs and Distance

Author

Listed:
  • Lawless, Martina

    (Central Bank and Financial Services Authority of Ireland)

  • Whelan, Karl

    (University College Dublin)

Abstract

One of the most famous and robust findings in international economics is that distance has a strong negative effect on trade. Bernard, Jensen, Redding, and Schott (2007) discuss how this can be decomposed into an effect due to the number of products and an effect due to average exports per product. Using US firm-level data, they show that distance has a strong negative effect on the number of products exported. However, they find that the intensive margin - average sales of individual products - is increasing with distance. We show that this apparently puzzling finding is consistent with models featuring firm heterogeneity in productivity and fixed costs associated with exporting to each market. We also show how evidence of this type can be used to derive new estimates of how distance affects fixed and variable trade costs and how these two costs combine to generate the distance effect on trade.

Suggested Citation

  • Lawless, Martina & Whelan, Karl, 2007. "A Note on Trade Costs and Distance," Research Technical Papers 7/RT/07, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:7/rt/07
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    References listed on IDEAS

    as
    1. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2007. "Firms in International Trade," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 105-130, Summer.
    2. Samuel S. Kortum, 1997. "Research, Patenting, and Technological Change," Econometrica, Econometric Society, vol. 65(6), pages 1389-1420, November.
    3. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting Trade: Firms, Industries, and Export Destinations," American Economic Review, American Economic Association, vol. 94(2), pages 150-154, May.
    4. Lawless, Martina, 2009. "Firm export dynamics and the geography of trade," Journal of International Economics, Elsevier, vol. 77(2), pages 245-254, April.
    5. 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.
    6. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    7. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2007. "Comparative Advantage and Heterogeneous Firms," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(1), pages 31-66.
    8. repec:rus:hseeco:122439 is not listed on IDEAS
    9. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2003. "Export versus FDI," NBER Working Papers 9439, National Bureau of Economic Research, Inc.
    10. Carsten Eckel & J. Peter Neary, 2010. "Multi-Product Firms and Flexible Manufacturing in the Global Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(1), pages 188-217.
    11. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(2), pages 441-487.
    12. Xavier Gabaix, 1999. "Zipf's Law for Cities: An Explanation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(3), pages 739-767.
    13. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
    14. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
    15. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2011. "Multiproduct Firms and Trade Liberalization," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(3), pages 1271-1318.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Balazs Murakozy & Gabor Bekes, 2009. "Temporary Trade," CERS-IE WORKING PAPERS 0909, Institute of Economics, Centre for Economic and Regional Studies.
    2. Matthieu Crozet & Keith Head & Thierry Mayer, 2012. "Quality Sorting and Trade: Firm-level Evidence for French Wine," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(2), pages 609-644.
    3. Mario Larch & Pehr-Johan Norbäck & Steffen Sirries & Dieter M. Urban, 2016. "Heterogeneous Firms, Globalisation and the Distance Puzzle," The World Economy, Wiley Blackwell, vol. 39(9), pages 1307-1338, September.
    4. Békés, Gábor & Muraközy, Balázs, 2012. "Temporary trade and heterogeneous firms," Journal of International Economics, Elsevier, vol. 87(2), pages 232-246.
    5. repec:spo:wpecon:info:hdl:2441/10148 is not listed on IDEAS
    6. repec:spo:wpmain:info:hdl:2441/10148 is not listed on IDEAS
    7. Andrew Jia-Yi Kam, 2015. "Determinants Of International Production Fragmentation: Malaysia’S Experience In The Information, Communications And Telecommunications (Ict) Industry," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 60(05), pages 1-22, December.

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    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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