James E. Anderson&Penglong Zhang | Latent Exports: Almost Ideal Gravity and Zeros
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▋The Review of Economics and Statistics
September 27 2022
Latent Exports: Almost Ideal Gravity and Zeros
James E. Anderson: Boston College, Department of Economics, Chestnut Hill, MA 02467 james.anderson@bc.edu
Penglong Zhang: Tsinghua University, School of Public Policy and Management, and Institute for Contemporary China Study, Beijing, 100084 zhangpenglong@tsinghua.edu.cn
Abstract
Export promotion at the extensive margin is a key concern of governments. We develop measures of how far firms in origin sectors are from break-even entry in destination markets. The measure is based on Almost Ideal gravity featuring heterogeneous price and income elasticities. Tobit estimation of 2006 trade flows for 75 countries and 25 sectors generates Latent Trade Bias (LTB) – the latent (projected) trade share of non-partners minus the as-if-frictionless trade share. Explained LTB variance decomposition shows that variable trade costs (distance and tariffs together) account for zero flows more than do fixed trade costs (entry cost) and income variation.
Key Words
Zero flows, variable cost, fixed cost, latent trade
