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The Gravity Equation in International Trade: An Explanation

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  • Chaney, Thomas

Abstract

The 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.

Suggested Citation

  • Chaney, Thomas, 2013. "The Gravity Equation in International Trade: An Explanation," CEPR Discussion Papers 9613, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9613
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Lugovskyy, Oleksandr & Skiba, Alexandre, 2014. "Effect of distance on trade under slope heterogeneity and cross-correlated effects," Economics Discussion Papers 2014-30, Kiel Institute for the World Economy (IfW).
    2. repec:bla:worlde:v:40:y:2017:i:6:p:1155-1183 is not listed on IDEAS
    3. Marianne Baxter, 2017. "Robust Determinants of Bilateral Trade," 2017 Meeting Papers 591, Society for Economic Dynamics.
    4. 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.
    5. 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.
    6. Thomas Chaney, 2014. "The Network Structure of International Trade," American Economic Review, American Economic Association, vol. 104(11), pages 3600-3634, November.
    7. Anna Wong, 2017. "China’s Current Account : External Rebalancing or Capital Flight?," International Finance Discussion Papers 1208, Board of Governors of the Federal Reserve System (U.S.).
    8. Elizaveta Archanskaia & Guillaume Daudin, 2012. "Heterogeneity and the Distance Puzzle," FIW Working Paper series 095, FIW.
    9. Antoine Berthou & Hélène Ehrhart, 2017. "Trade networks and colonial trade spillovers," Review of International Economics, Wiley Blackwell, vol. 25(4), pages 891-923, September.
    10. Ferdinand Rauch, 2014. "A Fable of Bees and Gravity," Economics Series Working Papers 716, University of Oxford, Department of Economics.
    11. Xavier Gabaix, 2016. "Power Laws in Economics: An Introduction," Journal of Economic Perspectives, American Economic Association, vol. 30(1), pages 185-206, Winter.
    12. repec:hrv:faseco:34651705 is not listed on IDEAS
    13. Montinari, Letizia & Stracca, Livio, 2016. "Trade, finance or policies: What drives the cross-border spill-over of business cycles?," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 131-148.
    14. Ali Palali & Bas Straathof & Rinske Windig, 2017. "The effect of geographical distance on online transactions: Evidence from the Netherlands," CPB Discussion Paper 362, CPB Netherlands Bureau for Economic Policy Analysis.
    15. Michal Paulus & Eva Michalikova & Vladimir Benacek, 2014. "German International Trade: Interpreting Export Flows According to the Gravity Model," Working Papers IES 2014/19, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised May 2014.
    16. Head, Keith & Jing, Ran & Swenson, Deborah L., 2014. "From Beijing to Bentonville: Do multinational retailers link markets?," Journal of Development Economics, Elsevier, vol. 110(C), pages 79-92.

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    Keywords

    Gravity;

    JEL classification:

    • F1 - International Economics - - Trade

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