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A Note on Trade Costs and Distance

  • Martina Lawless

    (Central Bank)

  • Karl Whelan

    (University College Dublin)

One of the most famous and robust findings in international economics is that distance has a strong negative effect on trade. Bernard, Jensen, Redding, and Schott (2007) discuss how this can be decomposed into an effect due to the number of products and an effect due to average exports per product. Using US firm-level data, they show that distance has a strong negative effect on the number of products exported. However, they find that the intensive margin—average sales of individual products—is increasing with distance. We show that this apparently puzzling finding is consistent with models featuring firm heterogeneity in productivity and fixed costs associated with exporting to each market. We also show how evidence of this type can be used to derive new estimates of how distance affects fixed and variable trade costs and how these two costs combine to generate the distance effect on trade.

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File URL: http://www.ucd.ie/economics/research/papers/2007/WP07.16.pdf
File Function: First version, 2007
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Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200716.

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Length: 17 pages
Date of creation: 17 Nov 2007
Date of revision:
Handle: RePEc:ucn:wpaper:200716
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  1. Andrew Bernard & Stephen Redding & Peter Schott, 2004. "Comparative advantage and heterogeneous firms," IFS Working Papers W04/24, Institute for Fiscal Studies.
  2. Stephen J Redding & Peter K Schott & Andrew B Bernard, 2007. "Multi-product Firms and Trade Liberalization," 2007 Meeting Papers 44, Society for Economic Dynamics.
  3. Helpman, Elhanan & Melitz, Marc J & Yeaple, Stephen R, 2003. "Export versus FDI," CEPR Discussion Papers 3741, C.E.P.R. Discussion Papers.
  4. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  5. repec:rus:hseeco:122439 is not listed on IDEAS
  6. Samuel S. Kortum, 1997. "Research, Patenting, and Technological Change," Econometrica, Econometric Society, vol. 65(6), pages 1389-1420, November.
  7. Andrew Bernard & J. Bradford Jensen & Stephen Redding & Peter Schott, 2007. "Firms in International Trade," Working Papers 07-14, Center for Economic Studies, U.S. Census Bureau.
  8. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc.
  9. Lawless, Martina, 2007. "Firm Export Dynamics and the Geography of Trade," MPRA Paper 10008, University Library of Munich, Germany.
  10. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
  11. Rubinstein, Yona & Helpman, Elhanan & Melitz, Marc, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," Scholarly Articles 3228230, Harvard University Department of Economics.
  12. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting trade: firms, industries, and export destinations," Staff Report 332, Federal Reserve Bank of Minneapolis.
  13. Eckel, Carsten & Neary, J. P., 2010. "Multi-product firms and flexible manufacturing in the global economy," Munich Reprints in Economics 20525, University of Munich, Department of Economics.
  14. Carsten Eckel & J Peter Neary, 2006. "Multi-Product Firms and Flexible Manufacturing in the Global Economy," Working Papers 200608, School Of Economics, University College Dublin.
  15. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  16. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
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