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The Gravity Equation in International Trade: An Explanation

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  • Thomas Chaney

    (Département d'économie)

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," Sciences Po publications WP 19825, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/6k7m0q7h709rdrhbpm2n96irf8
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    References listed on IDEAS

    as
    1. 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.
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    JEL classification:

    • F1 - International Economics - - Trade

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