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Editor
Rómulo Chumacero
Executive Editor
Andrea Sandoval A.
Detalle / Detail
Estimating the gravity equation with the actual number of exporting firms
Authors: Minondo, Asier; Requena, Francisco
Vol. 40, Nº 1, pp. 5 - 19 , 2013
Jel: F14, F15

To estimate correctly the effect of variable trade costs on firms’ exports, the
gravity equation should control for the number of firms that participate in foreign
markets. Due to the absence of these data, previous studies control for this
omitted variable using econometric strategies that may also lead to inconsistent
estimates. To overcome this problem the present paper estimates a gravity equation
using a new database compiled by the OECD and Eurostat stat that reports
the number of exporting firms by reporter and partner country. We show that
not controlling for the extensive margin of trade introduces very serious biases
in the estimated trade cost coefficients.

To estimate correctly the effect of variable trade costs on firms’ exports, the
gravity equation should control for the number of firms that participate in foreign
markets. Due to the absence of these data, previous studies control for this
omitted variable using econometric strategies that may also lead to inconsistent
estimates. To overcome this problem the present paper estimates a gravity equation
using a new database compiled by the OECD and Eurostat stat that reports
the number of exporting firms by reporter and partner country. We show that
not controlling for the extensive margin of trade introduces very serious biases
in the estimated trade cost coefficients.

Key Words: Gravity equation, exporting firms, distance, trade costs, OECD.

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