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American Economic Review: Vol. 98 No. 4 (September 2008)

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Distorted Gravity: The Intensive and Extensive Margins of International Trade

Article Citation

Chaney, Thomas. 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade." American Economic Review, 98(4): 1707-21.

DOI: 10.1257/aer.98.4.1707

Abstract

By considering a model with identical firms, 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. I prove that the extensive margin and the intensive margin are affected by the elasticity of substitution in exact opposite directions. When the distribution of productivity across firms is Pareto, 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. (JEL F12, F13)

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Authors

Chaney, Thomas (U Chicago)

JEL Classifications

F12: Models of Trade with Imperfect Competition and Scale Economies
F13: Trade Policy; International Trade Organizations


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