Distorted Gravity: The Intensive and Extensive Margins of International Trade

@article{Chaney2008DistortedGT,
  title={Distorted Gravity: The Intensive and Extensive Margins of International Trade},
  author={Thomas Chaney},
  journal={International Trade eJournal},
  year={2008}
}
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… Expand
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