Beyond Gravity: The Composition of Multilateral Trade

By Ahmad Lashkaripour (Indiana University Bloomington)

What type of goods does the US export to Canada? What type of goods does it export to New Zealand? Guided by a standard gravity model we know very well that the US exports more (in value terms) to Canada than New Zealand. However, gravity models tell us little about the composition of US exports across various destinations. Standard gravity models focus on the intensive margin of trade. Tracking the evolution of trade patterns and trade theory over time explains why the gravity models were constructed this way, and why it’s time to move forward.

Trade theory, before the 1980s, had a sharp focus: describing the commodity composition of trade. Classical theories described the exchange of dissimilar goods between dissimilar countries in a bilateral world. In a classical framework, the labor abundant country would export the labor-intensive good, whereas the capital abundant country would export the capital-intensive good. In the early 1980s, evidence pointed to a different –non-classical– type of trade: exchange of similar goods between similar countries. To account for this type of trade, trade theory experienced a shift in paradigm, and gravity models were born. Gravity models describe the volume of trade in a multilateral world, where both similar and dissimilar countries engage in two-way trade. In contrast to classical models, gravity models are tractable and easy to estimate in a general equilibrium multi-country setting. Tractability, however, comes at a cost. Gravity models overlook the composition margin, and do not deliver detailed predictions about what type of goods countries trade.

Two recent developments, however, point to the increasing importance of the composition margin. First, poor and remote countries have become increasingly engaged in global trade (in 2006, for the first time, the US did more trade with developing countries than with other developed nations). Second, micro-level evidence indicates that both geography (remoteness) and per capita income have systematic effects on the composition of trade. This evidence is exemplified by three basic facts:

  1. Geography systematically affects the price-composition of exports (faraway countries exchange higher price, higher quality, goods)
  1. Per capita income increases the price-composition of exports (within narrowly defined categories, rich countries export higher price, higher quality goods)
  1. Trade-to-GDP increases systematically with per capita income (rich countries import and export goods that are more tradable).

These facts are beyond the scope of both classical and gravity models. In recent years much progress has been made in explaining these facts individually.[i] Nevertheless, there remains a void. First, we do not have a unified theory that accounts for the effect of both geography and per capita income — existing theories usually confront one aspect of the data in isolation, and overlook the others. Second, to address the composition margin, existing theories generally rely on non-homothetic preferences or non-iceberg trade costs. This involves sacrificing tractability, and tractability has been a major force behind the success of gravity models.

In Lashkaripour (2015a), I confront this void. I argue that a simple extension to the theory of comparative advantage could explain both the effect of geography and the effect of per capita income on the composition of trade.[ii] Building on this idea, I develop a unified model that fully describes both the volume and the composition of trade in a multi-lateral world. Similar to standard gravity models, the unified model adopts homothetic preferences and iceberg trade costs, making it tractable and straightforward to estimate. The main insight of the paper, however, concerns the welfare gains from trade. Estimating the model reveals that the composition margin has profound effects on the gains from trade. Specifically, embedding systematic specialization into a gravity model (to account for composition) more than triples the gains from trade. Furthermore, the gains from trade systematically favor poor and remote nations. This outcome is remarkable, given that incorporating other margins such as firm heterogeneity seem to contribute minimally to the gains from trade (Arkolakis et al. (2011)).

Currently, we are equipped with a rich set of theories that shed light on the composition of trade. More importantly, depending on which theory we believe, the composition margin has deep impacts on the gains from global integration. The next major step is evaluating these theories with micro-level data. Caron et al. (2014), among others, have made notable progress on this front.[iii] Further progress in this direction would allow us to better understand the aggregate effects of global integration, especially on poor and remote nations.


Arkolakis, C., A. Costinot, and A. Rodriguez (2012). Clare, 2012, new trade models, same old gains. American Economic Review 102(1), 94.

Baldwin, R. and J. Harrigan (2011). Zeros, quality, and space: Trade theory and trade evidence. American Economic Journal: Microeconomics 3(2), 60–88.

Caron, J., T. Fally, and J. R. Markusen (2014). International trade puzzles: A solution linking production and preferences. The Quarterly Journal of Economics 129(3), 1501–1552.

Dingel, J. I. (2014). The determinants of quality specialization. Technical report, WTO Staff Working Paper.

Eaton, J. and S. Kortum (2002). Technology, geography, and trade. Econometrica 70(5), 1741–1779.

Fajgelbaum, P., G. M. Grossman, and E. Helpman (2011). Income distribution. Product Quality, and International Trade, Journal of Political Economy 118(4), 721.

Fieler, A. C. (2011). Nonhomotheticity and bilateral trade: evidence and a quantitative explanation. Econometrica 79(4), 1069–1101.

Hummels, D. and A. Skiba (2004). Shipping the good apples out? an empirical confirmation of the Alchian-Allen conjecture. Journal of Political Economy 112(6).

Lashkaripour, A. (2015a). The composition of trade in a multilateral world. Technical report, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.

Lashkaripour, A. (2015b). Worth its weight in gold: Product weight, international shipping, and patterns of trade.

Melitz, M. (2003). The impact of trade on aggregate industry productivity and intra-industry reallocations. Econometrica 71(6), 1695–1725.


[i]To explain the effect of per capita income on the composition margin, many studies have embedded non-homotheticity into standard gravity models. Fieler (2011), for example, embeds non-homthetic preferences into an Eaton-Kortum model.  She assumes that rich countries consume relatively more of goods, which are more technologically differentiated. Such goods are subject to lower trade elasticities and are more tradable. This entails that rich countries import a higher share of their GDP. Another example is Fajgelbaum et al. (2011), who apply non-homotheticity to a Krugman model. In their framework the home market effect induces firms in rich countries to specialize in high-quality goods. As a result, rich countries become net exporters of high-price, high quality products.

To account for the effect of geography on the composition of trade, most studies abstract from the standard iceberg cost assumption, and assume that trade costs are additive. This approach builds on the Alchian-Allen conjecture, and is exemplified in Hummels and Skiba (2004). Baldwin and Harrigan (2011) offer an alternative theory that reconciles the effect of geography (on composition) with iceberg trade costs. Building on Melitz (2003), they develop a quality-sorting framework where high-quality firms are the most competitive and sort into the toughest, most remote markets.

[ii] I relax a commonly used “gravity” assumption that does not align with micro-level evidence. Standard gravity models assume that all goods offer the same scope for product differentiation, whereas I allow for two types of goods: a highly differentiated type and a less differentiated type. By definition, demand for the highly differentiated type is quality-intensive, whereas demand for the less differentiated type is quantity-intensive. In equilibrium, quality abundant (high-wage) and remote countries have comparative advantage in the highly differentiated type. Labor abundant (low-wage) countries, on the other hand, have comparative advantage in the less differentiated type. This leads to systematic international specialization in production. Production specialization combined with the fact that (in equilibrium) the highly differentiated type exhibits a higher markup and is more tradable, explain the composition of multi-lateral trade.

[iii]Caron et al. (2014) show that income-elastic goods are more skill-intensive. Their results imply that non-homotheticity is an important factor in explaining puzzles relating to composition. Dingel (2015) utilizes firm-level data to discriminate between two theories that explain the higher price-mix of exports from rich countries. He shows that the Home-market effect is as important as comparative advantage in explaining this pattern. In Lashkaripour (2015b), I use product level data to analyze the effect of geography on the price composition of exports. Estimation results indicate that markups are the main driver of the observed patterns.





Economic Development through Export Promotion

If economic development is essentially about an economy’s transition from agricultural to industrial production, then the attainment of a comparative advantage in industrial products is widely regarded to be the hallmark of successful development.  Against this backdrop, governments aiming to promote development often seek to do so partly through the promotion of industrial exports.  In light of this, a literature has developed in economics recently to understand whether and under what circumstances policy to promote exports has been successful.

This recent literature focuses on two different types of market imperfection that could motivate government intervention to promote exports.  The first involves hysteresis in exporting.  This is driven by firm heterogeneity in productivity and a sunk cost to foreign market entry, whereby the return to becoming an exporter today includes the option value of continuing to exporting in future without incurring start-up costs.  The second type of market imperfection involves a cost of self-discovery both of new products and of new markets based on learning about the specific products in which a country has a comparative advantage.  In both cases an across-the-board policy to promote exports is found to address the market imperfection: export subsidy and a real exchange rate depreciation respectively.  The main policy conclusion is that an appropriate government policy can help to circumvent the externalities that firms face and hence promote industrial development.  But to be successful these policies must allow the market, as opposed to the government, to determine which firms and products prevail.  While these policy conclusions are promising for economic development in and of themselves, they risk imposing mercantilist or begger-thy-neighbour externalities of their own on other countries.  Indeed, such are the risks associated with export subsidies that there is an initiative at the WTO to phase them out altogether.  Therefore, future research could usefully evaluate whether and how policies can address domestic market imperfections associated with underdevelopment without imposing adverse effects on other nations.

Bernard, A.B., J. Eaton, J.B. Jensen and S. Kortum, (2003); “Plants and Productivity in International Trade.American Economic Review, 93(4): 1268-1290. [Working paper version]

Das, S., M.J. Roberts and J.R. Tybout (2007); “Market Entry Costs, Producer Heterogeneity, and Export Dynamics.” Econometrica, 75(3): 837-873. [Working paper version]

Dixit, A., (1989); “Hysteresis, Import Penetration, and Exchange Rate Pass-Through.” Quarterly Journal of Economics, 104(2): 205-228.

Fernandes, A., and H. Tang, (2014); “Learning to Export from Neighbors.Journal of International Economics, 94(1): 67-84. [Working paper version]

Freund, C., and M.D. Pierola, (2012); “Export Surges.Journal of Development Economics 97: 387-395.

Hausmann, R., and D. Rodrik, (2003); “Economic Development as Self Discovery.Journal of Development Economics, 72(2): 603-633. [Working paper version]

New Working Papers – July 2015

The following working papers have recently been added to our working papers page.

Anesi, Vincent and Giovanni Facchini (2014) “Coercive Trade Policy

Baland, Jean-Marie,  Rohini Somanathan and Zaki Wahhaj (2014) “Group Lending and Endogenous Social Sanctions

Basu, Kaushik and Avinash Dixit (2014) “Too Small to Regulate

Besedes, Tibor (2014) “The Effects of European Integration on the Stability of International Trade: A Duration Perspective

Brown, James R., J.Anthony Cookson and Rawley Heimer (2015) “Law and Finance Matter: Lessons from Externally Imposed Courts

Camarero, Mariam, Inmaculada Martínez-Zarzoso, Felicitas Nowak-Lehmann D. and Cecilio Tamarit (2013) “Trade Openness and Income: A Tale of Two Regions

Cookson, J. Anthony (2014) “Economic Consequences of Judicial Institutions: Evidence from a Natural Experiment

Eberhardt, Markus, Zheng Wang and Zhihong Yu (2015) “From One to Many Central Plans: Drug Advertising Inspections and Intra-National Protectionism in China

Lopes da Fonseca, M. and T. Baskaran (2015) “Re-evaluating the economic costs of conflicts

Martinez-Zarzoso, Inmaculada, Felicitas Nowak-Lehmann D. and Kai Rehwald (2014) “Is aid for trade effective? A Quantile Regression Approach

Resources for the Future (RFF) Openings for Fellows in Postdoctoral Program in Natural Resources and the Environment

Resources for the Future (RFF) currently has openings for several postdoctoral researchers. RFF’s Postdoctoral Program in Natural Resources and the Environment promotes research and policy analysis in natural resources, energy and the environment. The program is designed to provide unique opportunities for postdoctoral fellows to contribute to projects underway, pursue new lines of inquiry, and participate with RFF fellows and senior fellows in engaging fully with policymakers in Washington, DC.

ABOUT RFF: RFF is a nonprofit, nonpartisan research institution focused on independent economic and quantitative policy analysis in the fields of environment, energy and climate, and natural resources ( RFF is committed to scholarly excellence and policy application and offers an outstanding environment for academic publication and high-level communication of research to policy audiences.

JOB DESCRIPTION: Five positions are available:
– Resilience in coastal communities to repeated hurricanes. The project is funded by the National Science Foundation ( and in addition to working with RFF researchers, the postdoc may have opportunities to collaborate with other researchers on the grant at Johns Hopkins University, Georgetown University, the University of Michigan, George Mason University, and the University of Maryland’s National Socio-Environmental Synthesis Center (SESYNC). Depending on expertise and interests, the postdoc may work on (i) agent-based modeling of land and housing markets; (ii) integration of the agent-based model with other team members’ models of storm surge, wind damages and hurricane mitigation choices; (iii) model-based policy analyses of options to alter land use to promote resilience and/or (iv) an empirical investigation of homeowner and business investments in hurricane mitigation options. The position requires strong skills in mathematical programming, including experience with MatLab; expertise in working with spatial data, GIS software, Stata and R; and a demonstrated interest in coastal issues, including topics related to land use and development in coastal areas, extreme weather events, and climate adaptation. In addition, some knowledge and experience with agent-based models is desirable. Candidates should have recently completed a Ph.D. in economics, decision sciences, geography, urban planning, environmental engineering or a related discipline.

– Forest carbon tracking. Funded by the U.S. National Aeronautics and Space Administration (NASA) and the University of Maryland’s National Socio-Environmental Synthesis Center (SESYNC), this project focuses on using satellite and other remote sensing data to target and evaluate forest conservation/REDD+ policies in Latin America. The postdoc’s main responsibility will be helping to conduct quasi-experimental evaluations of forest conservation policy using remote sensing data. The postdoc will also help refine and disseminate computational web-based decision tools for forest conservation. Candidates should have strong econometrics skills; excellent written communication skills; a demonstrated interest in forest conservation policy, preferably evaluation and/or targeting of such policies; and at least some familiarity with remote sensing, spatial data, and geographic information systems. In addition, Spanish language skills and computer programming (e.g., Matlab, C++, Python) are desirable.

– Ecosystem service valuation and conservation. This position centers on empirical and econometrically focused work on several ecosystem service valuation projects, including global meta-analysis of forest valuation; stated preference research to value ecosystems in the United States; and new research collaboration between RFF and the Environment for Development Centers (EfD) in Chile, Costa Rica, China, Ethiopia, Kenya, Tanzania, and South Africa. The postdoc will participate in all aspects of research, including data collection and analysis, development and estimation of econometric models, and design and organization of workshops. The position requires solid training and skills in applied econometrics as well as experience in Stata and Matlab (or R or GAUSS). Experience with spatial data and GIS is a plus. Candidates should have recently completed a Ph.D. in economics, agricultural and resource economics, or a related field.

– Energy and water modeling of Arizona and the Southwest. This project will design and build an energy flow model of Arizona and surrounding western states. The post doc will lead this project, working at RFF under the leadership of scholars at RFF and Arizona State University (ASU). Funds for occasional travel to ASU will be provided. Principal duties and responsibilities include design and implementation of an energy system model (adaptation of existing models is a possible approach), an algorithm for integration of the energy flow model with a general equilibrium model (integration with an existing computable general equilibrium (CGE) model at RFF or other institutions is a possible approach), a plan for the acquisition and maintenance of raw data inputs, and execution of model simulations as part of a policy or research driven collaboration with scholars at RFF and ASU. The project also requires full documentation of the model and a template for reporting model results. Collaboration in preparation of working papers, journal articles and other written materials is also expected. Candidates must have a strong background in economics and economic modeling. Useful specialized skills could include familiarity with general equilibrium theory, mixed complementary programing, operations research and/or optimization, and energy sector and regulatory knowledge. Programming experience in MATLAB or GAMS is highly relevant and experience with Python, R, Stata, SAS or Analytica is useful.

– Uncertainty quantification for the carbon cycle and policy implications. This project centers on improving the quantification of climate uncertainty to support uncertainty propagation in integrated assessment models. The postdoc will work with RFF fellows to identify the major uncertainties in the carbon cycle, including dynamics of carbon transfers; design an elicitation protocol to enable domain experts to quantify the relevant uncertainties; conduct elicitations; project the uncertainties onto parameters of a carbon cycle model; and draw policy implications. The postdoc will also promote deeper awareness of climate science at RFF by designing a seminar series inviting climate science experts to RFF. The candidate must have a strong background in carbon cycle modeling, high dimensional dependence modeling and policy aspects of climate change.

JOB QUALIFICATIONS: All candidates for the above positions should have (i) a PhD completed prior to beginning the postdoc, (ii) excellent written communication skills, (iii) enthusiasm for interdisciplinary research, as well as interest and ability to work with researchers from multiple disciplines, and (iv) ability and desire to collaborate with a team of RFF Research Fellows and Research Assistants.

FURTHER INFORMATION: All positions are for a one-year appointment beginning in fall 2015 and may be renewable for a second year upon satisfactory performance and funding availability. The position provides some support for independent research, including publishing papers from a completed dissertation. RFF offers a competitive salary and employee benefits.

APPLICATION PROCEDURE: Review of applications will begin August 31, 2015 and continue until the positions are closed. Application materials must be in PDF format and include a cover letter (indicating the position/s you are applying for), CV, transcript, and three letters of reference. All applicants should use the online application process at to submit the cover letter, CV and transcript. For letters of reference, please include candidate name in subject line and email them to . Should you experience any difficulty in applying online, please email  or call Mara Parrish at (202) 328-55053.

RFF is an equal opportunity employers. Women, minorities and veterans are encouraged to apply.