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Structural gravity equations with intensive and extensive margins

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  • Matthieu Crozet
  • Pamina Koenig

Abstract

New trade models with heterogeneous firms have had a consequent influence on gravity equations. According to Chaney (2007) and Melitz and Ottaviano (2005), the theoretical relationship between trade costs and trade flows is the sum of the effect of trade costs on the number of exporting firms (the extensive margin) and the value of individual exports (the intensive margin). The distinctive effect of distance on the two margins deeply modifies predictions of the trade literature, among which the sectoral effect of trade policies. Using French firms-level export data to 61 countries, on the period 1989-1992, we provide unbiased structural estimates of the three parameters governing trade elasticities with respect to distance. This dissection of the gravity equation provides consistent evidence in favor of heterogeneous firms models of trade.

Suggested Citation

  • Matthieu Crozet & Pamina Koenig, 2007. "Structural gravity equations with intensive and extensive margins," EconomiX Working Papers 2007-36, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2007-36
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    More about this item

    Keywords

    Gravity equation; International trade; Firm heterogeneity.;
    All these keywords.

    JEL classification:

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

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