Zeros, Quality, and Space: Trade Theory and Trade Evidence

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. As a matter of arithmetic, the value of trade depends on the number of goods traded, the amount of each good that is shipped, and the prices they are sold for. Most studies of trade volumes have not distinguished among these three factors. In this paper, we show that focusing on how the number of traded goods and their prices differ as a function of trade costs and market size, turns out to be very informative about the ability of trade theory to match trade data. We establish some new facts about United States trade using the most disaggregated data publicly available. First, most potential export flows are not present, and the incidence of these “export zeros” is strongly correlated with distance and importing country size. Second, export unit values are positively related to distance