The distance effects on the intensive and extensive margins of trade over time

Abstract

The empirical trade literature has long been puzzled by the finding of large and non-decreasing distance coefficients in the gravity equation amid falling transportation costs over time. To shed new light on this puzzle, the recent theoretical literature shifts its focus to the differential effects of distance on the extensive and intensive margins of trade. However, so far there is a lack of corresponding contributions from empirical studies of the gravity equation. This paper provides the first piece of evidence using data for about 150–200 countries between the years 1980 and 2009. The extensive and intensive margins are measured based on bilateral trade data of more than 3,100 product items. It is found that the distance effect on the extensive margin declines, while that on the intensive margin rises over time for most specifications. Therefore, there is little empirical evidence that distinguishing between the extensive and intensive margins of trade solves the distance puzzle.