Deconstructing Gravity: Trade Costs And Extensive And Intensive Margins
Source: Central Bank of Ireland
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). The authors show how the effects of distance and a range of other proxies for trade costs have different impacts on the two margins.