The Distance Effects on the Intensive and Extensive Margins of Trade Over Time

The empirical trade literature has long been puzzled by the finding of a large and non-decreasing distance coefficient 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 studies of empirical gravity equations. This paper provides the first evidence using data for about 150-200 countries between the years 1980 and 2009. Extensive and intensive margins are measured based on bilateral trade data of more than 3100 product items. It is found that the distance effect on the extensive margins declines while that on the intensive margins rises over time. The same conclusion is reached when the distance effects are allowed to be sector-specific.