This article develops an analytical framework to study firm and exporter growth and provides a dynamic foundation for a standard general equilibrium trade model. Firm-level growth is the result of idiosyncratic productivity improvements with a continuous arrival of new potential producers. A firm enters a market if it is profitable to incur the marginal cost to reach the first consumer and pays an increasing marketing cost to reach additional consumers. I calibrate the model using data on the cross section of firm sales and bilateral trade, as well as the rate of incumbent firm exit. The calibrated model predicts that a firm’s growth is inversely related to its initial size, and that the distribution of growth rates of small firms is heavily skewed to the right. These predictions are confirmed by looking at the growth of sales of U.S. firms and Brazilian exporters to the United States. I use this model to study the impact of cross-firm reallocations on economic activity and measured productivity.

We study the theoretical properties and counterfactual predictions of a large class of general equilibrium trade and economic geography models. By combining aggregate factor supply and demand functions with market-clearing conditions, we prove that existence, uniqueness, and—given observed trade flows—the counterfactual predictions of any model within this class depend only on the demand and supply elasticities (“gravity constants”). Using a new “model-implied” instrumental variables approach, we estimate these gravity constants and use these estimates to compute the impact of a trade war between the United States and China.

This paper develops a novel theory of marketing costs within a trade model with product differentiation and heterogeneity in firm productivities. A firm enters a market if it is profitable to incur the marginal cost to reach a single consumer. It then faces an increasing marginal penetration cost to access additional consumers. The model, therefore, can reconcile the observed positive relationship between entry and market size with the existence of many small exporters in each exporting market. Comparative statics of trade liberalization predict a large increase in trade for goods with positive but low volumes of previous trade.

We develop a general equilibrium framework to determine the spatial distribution of economic activity on any surface with (nearly) any geography. Combining the gravity structure of trade with labor mobility, we provide conditions for the existence, uniqueness, and stability of a spatial economic equilibrium and derive a simple set of equations that govern the relationship between economic activity and the geography of the surface. We then use the framework to estimate the topography of trade costs, productivities and amenities in the United States. We find that geographic location accounts for at least twenty percent of the spatial variation in U.S. income. Finally, we calculate that the construction of the interstate highway system increased welfare by 1.1 to 1.4 percent, which is substantially larger than its cost.

Endogenous Variety and the Gains from Trade by Costas Arkolakis, Svetlana Demidova, Peter J. Klenow and Andres Rodriguez-Clare. Published in volume 98, issue 2, pages 444-50 of American Economic Review, May 2008