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The Gravity Equation in International Trade: An Explanation

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  • Thomas Chaney

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract

The gravity equation in international trade states bilateral exports are proportional to economic size, and inversely proportional to geographic distance. While the role of size is well understood, that of distance remains mysterious. I offer an explanation for the role of distance: If (i) the distribution of firm sizes is Pareto, (ii) the average squared distance of a firm's exports is an increasing power function of its size, and (iii) a parameter restriction holds, then the distance elasticity of trade is constant for long distances. When the firm size distribution follows Zipf's law, trade is inversely proportional to distance.

Suggested Citation

  • Thomas Chaney, 2013. "The Gravity Equation in International Trade: An Explanation," SciencePo Working papers Main hal-03460790, HAL.
  • Handle: RePEc:hal:spmain:hal-03460790
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03460790
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    File URL: https://hal-sciencespo.archives-ouvertes.fr/hal-03460790/document
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    References listed on IDEAS

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    2. di Giovanni, Julian & Levchenko, Andrei A., 2013. "Firm entry, trade, and welfare in Zipf's world," Journal of International Economics, Elsevier, vol. 89(2), pages 283-296.
    3. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
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    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. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," SciencePo Working papers Main hal-03579844, HAL.
    7. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-1721, September.
    8. Xavier Gabaix & Rustam Ibragimov, 2011. "Rank - 1 / 2: A Simple Way to Improve the OLS Estimation of Tail Exponents," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 29(1), pages 24-39, January.
    9. Xavier Gabaix, 1999. "Zipf's Law for Cities: An Explanation," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 739-767.
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    11. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," SciencePo Working papers hal-03579844, HAL.
    12. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," Post-Print hal-03579844, HAL.
    13. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-116, March.
    14. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321-321.
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    Cited by:

    1. Rouzet, Dorothée & Benz, Sebastian & Spinelli, Francesca, 2017. "Trading Firms and Trading Costs in Services: Firm-Level Analysis," Conference papers 332911, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    2. Keith Head & Thierry Mayer & Mathias Thoenig, 2014. "Welfare and Trade without Pareto," American Economic Review, American Economic Association, vol. 104(5), pages 310-316, May.
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