Distorted Gravity: The Intensive and Extensive Margins of International Trade
By considering a model with identical firms, Krugman (1980) predicts that a higher elasticity of substitution between goods magnifies the impact of trade barriers on trade flows. In this paper, I introduce firm heterogeneity in a simple model of international trade. I prove that the extensive margin and the intensive margin are affected by the elasticity of substitution in exact opposite directions. When the distribution of productivity across firms is Pareto, the predictions of the Krugman model with representative firms are overturned: the impact of trade barriers on trade flows is dampened by the elasticity of substitution, and not magnified.
|Date of creation:||Sep 2008|
|Publication status:||Published in American Economic Review, 2008, vol. 98, pp.1707-1721|
|Contact details of provider:|| Web page: http://www.sciencespo.fr/|
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- Andersson, Martin, 2007. "Entry costs and adjustments on the extensive margin - an analysis of how familiarity breeds exports," Working Paper Series in Economics and Institutions of Innovation 81, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
- Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-116, March.
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