Distorted Gravity: The Intensive and Extensive Margins of International Trade

15 Pages Posted: 29 Sep 2012

See all articles by Thomas Chaney

Thomas Chaney

SciencesPo - Sciences Po - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: 2008

Abstract

By considering a model with identical firms, Paul 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. When the distribution of productivity across firms is Pareto, which is close to the observed size distribution of US firms, 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.

Suggested Citation

Chaney, Thomas, Distorted Gravity: The Intensive and Extensive Margins of International Trade (2008). American Economic Review, Vol. 98, No. 4, 2008, Available at SSRN: https://ssrn.com/abstract=2153694

Thomas Chaney (Contact Author)

SciencesPo - Sciences Po - Department of Economics ( email )

28, rue des Saints-Pères
Paris, Paris 75007
France

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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