Deconstructing Gravity: Trade Costs and Extensive and Intensive Margins

Martina Lawless

MPRA Paper from University Library of Munich, Germany

Abstract: One of the most robust empirical results in international economics is the existence of a negative relationship between trade flows and distance. More recent research on exporting activity at the firm level has established an apparently equally robust result— few firms export, and exporting firms do not sell in all possible markets. This paper uses data on US exports across 156 countries to decompose exports to each market into the number of firms exporting (the extensive margin) and average export sales per firm (the intensive margin). We show how the effects of distance and a range of other proxies for trade costs have different impacts on the two margins. We find that distance has a negative effect on both margins, but the magnitude of the coefficient is considerably larger and more significant for the extensive margin. Most of the variables capturing language, internal geography, infrastructure and import cost barriers work solely through the extensive margin. We show that these results are consistent with the predictions of a Melitz-style model of trade with heterogeneous firm productivity and fixed costs.

Keywords: Gravity Model of Trade; Heterogeneous Firms; Extensive Margin (search for similar items in EconPapers)
JEL-codes: F14 (search for similar items in EconPapers)
Date: 2008-08
New Economics Papers: this item is included in nep-bec and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Deconstructing gravity: trade costs and extensive and intensive margins (2010)
Journal Article: Deconstructing gravity: trade costs and extensive and intensive margins (2010)
Working Paper: Deconstructing Gravity: Trade Costs and Extensive and Intensive Margins (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:10230

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