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Deconstructing gravity: trade costs and extensive and intensive margins

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This paper uses data on US exports to decompose exports into the number of exporting firms (the extensive margin) and average export sales (the intensive margin). We show how a range of proxies for trade costs has different impacts on the two margins. Distance has a negative effect on both margins, but the magnitude is considerably larger for the extensive margin. Most of the variables capturing language, internal geography, infrastructure and import cost barriers work through the extensive margin. We show that these results are consistent with a Melitz-style model of trade with heterogeneous firm productivity and fixed costs.

Document Type: Research Article


Affiliations: Central Bank and Financial Services Authority of Ireland

Publication date: 2010-11-01

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