Bilateral, product-level data exhibit a number of strong patterns that can be used to evaluate international trade theories, notably the spatial incidence of “export zeros ” (correlated with distance and importer size), and of export unit values (positively related to distance). We show that leading theoretical trade models fail to explain at least some of these facts, and propose a variant of the Melitz model that can account for all the facts. In our model, high quality firms are the most competitive, with heterogeneous quality increasing with firms ’ heterogeneous cost. (JEL F11, F14, F40) The gravity equation relates bilateral trade volumes to distance and country size. Countless gravity equations have been estimated, usually with “good ” results, and trade theorists have proposed various theoretical explanations for gravity’s success. However, the many potential explanations for the success of the gravity equation make it a problematic tool for discriminating among trade models. 1 As a matter of arithmetic, the value of trade depends on the number of goods

How large are the benefits of transportation infrastructure projects, and what explains these benefits? To shed new light on these questions, I collect archival data from colonial India and use it to estimate the impact of India’s vast railroad network. Guided by six predictions from a general equilibrium trade model, I find that railroads: (1) decreased trade costs and interregional price gaps; (2) increased interregional and international trade; (3) eliminated the responsiveness of local prices to local productivity shocks (but increased the transmission of these shocks between regions); (4) increased the level of real income (but harmed neighboring regions without railroad access); (5) decreased the volatility of real income; and that (6), a sufficient statistic for the effect of railroads on welfare in the model accounts for virtually all of the observed reduced-form impact of railroads on real income. I find similar results from an instrumental variable specification, no spurious effects from over 40,000 km of lines that were approved but never built, and tight bounds on the estimated impact of railroads. These results suggest that transportation infrastructure projects can improve welfare significantly,

I develop a novel view of the trade frictions between rich and poor countries by arguing that to reconcile bilateral trade volumes and price data within a standard gravity model, the trade frictions between rich and poor countries must be systematically asymmetric, with poor countries facing higher costs to export relative to rich countries. I provide a method to model these asymmetries and demonstrate the merits of my approach relative to alternatives in the trade literature. I then argue that these trade frictions are quantitatively important to understanding the large differences in standards of living and total factor productivity across countries.

Investigations of the effect of quality differences on heterogeneous performance in exporting have been limited by lack of direct measures of quality. We examine exports of French wine, matching the exporting firms to producer ratings from two wine guidebooks. We show that high quality producers export to more markets, charge higher prices, and sell more in each market. Our model predicts quality sorting: the more difficult a market is to serve, the better on average will be the firms that serve it. Our findings point to the empirical importance of quality sorting in one industry and could be extended to other industries.

This paper develops an approach for quantifying the relative importance of different sources of comparative advantage for country welfare in a global trade equilibrium. To explain the pattern of specialization, I present a multi-country, perfectly-competitive Ricardian model that extends Eaton and Kortum (2002) to predict industry trade flows. In this framework, comparative advantage is determined by the interaction of country and industry characteristics, with countries specializing in industries whose specific production needs they are best able to meet with their factor endowments, institutional environment, and technological strengths. I estimate the model parameters using a large dataset of bilateral trade flows, comprising 82 countries and 20 manufacturing industries. I present results from a baseline OLS approach, and a simulated method of moments (SMM) procedure that takes into account the prevalence of zero trade flows in the data. The SMM estimates imply large average welfare gains from a hypothetical reduction in distance barriers, with developing countries benefiting substantially more than the OECD. I also examine the induced shift in industry composition when countries raise their factor endowments or improve the quality of their institutions, and quantify the welfare gains generated by such policy moves.

Barriers to international trade are known to be large but due to data limitations it is hard to measure them directly for a large number of countries over many years. To address this problem I derive a micro-founded measure of bilateral trade costs that indirectly infers trade frictions from observable trade data. I show that this trade cost measure is consistent with a broad range of leading trade theories including Ricardian and heterogeneous firms models. In an application I show that U.S. trade costs with major trading partners declined on average by about 40 percent between 1970 and 2000, with Mexico and Canada experiencing the biggest reductions.

I estimate the economic impact of the construction of colonial India’s railroad network from 1861-1930. Using newly collected district-level data on output, prices, rainfall, and intra- and international trade flows I estimate that the railroad network had the following effects: (1) Railroads caused transport costs along optimal routes (according to a network flow algorithm) to fall by 73 percent for an average shipment. (2) The lower transport costs caused by railroads significantly increased India’s interregional and international trade. (3) The responsiveness of a region’s agricultural prices to its own rainfall shocks fell sharply after it was connected to the railroad network, but its responsiveness to shocks in other regions on the railroad network rose. (4) Railroad lines raised the level of real agricultural income by 18 percent in the districts in which they were built. I find similar results using rainfall shortages in the 1877-78 agricultural year as an instrumental variable for railroad construction post-1880 (a response by the 1880 British parliament to the 1878 famine). And I find no effect in a variety of ‘placebo ’ specifications that use

New goods play a central role in many trade and growth models. We use detailed trade and firmlevel data from a large developing economy—India—to investigate the relationship between declines in trade costs, the imports of intermediate inputs and domestic firm product scope. We estimate substantial static gains from trade through access to new imported inputs. Accounting for new imported varieties lowers the import price index for intermediate goods on average by an additional 4.7 percent per year relative to conventional gains through lower prices of existing imports. Moreover, we find that lower input tariffs account on average for 31 percent of the new products introduced by domestic firms, which implies potentially large dynamic gains from trade. This expansion in firms ' product scope is driven to a large extent by international trade increasing access of firms to new input varieties rather than by simply making existing imported inputs cheaper. Hence, our findings suggest that an important consequence of the input tariff liberalization was to relax technological constraints through firms ’ access to new imported inputs that were unavailable prior to the liberalization.

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Abstract. This paper provides firm-level evidence that credit constraints restrict international trade flows and affect the pattern of foreign direct investment. Using detailed data from China, we show that foreign-owned firms and joint ventures have better export performance than private domestic firms, and this advantage is systematically greater in sectors at higher levels of financial vulnerability measured in a variety of ways. This confirms that financial frictions restrict international trade and is consistent with foreign affiliates being less credit constrained because they can tap internal funding from their parent company. Our results imply that FDI can compensate for domestic financial market imperfections and alleviate their impact on aggregate growth, trade and private sector development. Credit constraints and host-country financial institutions thus offer a new explanation for the sectoral and spatial composition of MNC activity.