Distorted Gravity: The Intensive and Extensive Margins of International Trade
15 Pages Posted: 29 Sep 2012
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: 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
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