The Gravity Equation in International Trade: An Explanation

51 Pages Posted: 3 Sep 2013

See all articles by Thomas Chaney

Thomas Chaney

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

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Date Written: August 2013

Abstract

The gravity equation in international trade is one of the most robust empirical finding in economics: bilateral trade between two countries is proportional to size, measured by GDP, and inversely proportional to the geographic distance between them. While the role of size is well understood, the role of distance remains a mystery. I propose the first explanation for the gravity equation in international trade, based on the emergence of a stable network of input-output linkages between firms. Over time, a firm acquires more suppliers and customers, which tend to be further away. I show that if, as observed empirically, (i) the distribution of firm sizes is well approximated by Zipf’s law and (ii) larger firms export over longer distances on average, then aggregate trade is inversely proportional to distance. Data on firm level, sectoral, and aggregate trade support further predictions of the model.

Keywords: Gravity

JEL Classification: F1

Suggested Citation

Chaney, Thomas, The Gravity Equation in International Trade: An Explanation (August 2013). CEPR Discussion Paper No. DP9613, Available at SSRN: https://ssrn.com/abstract=2319938

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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