Report Number

2005-002

Abstract

A large literature has shown that geographic frictions reduce trade, but has not clarified precisely why. In this paper we provide some insight into why such frictions matter by focusing on precisely what they matter for. We ask: what parts of trade do these frictions reduce most? Using data that tracks manufacturers’ shipments within the United States on an exceptionally fine grid, we find that the pattern of shipments is extremely localized. Shipments within 5-digit zip codes, which have a median radius of just 4 miles, are 3 times larger than shipments outside the zip code. We decompose aggregate shipments into extensive and intensive margins, and show that distance and other frictions reduce aggregate trade values primarily by reducing the number of commodities shipped and the number of establishments shipping. Extensive margins are particularly important over very short distances. We consider two broad reasons for these facts and conclude that trade in intermediate goods is the most likely explanation for highly localized shipments and the dominant role of the extensive margin. In another significant finding, we find no evidence of state-level home bias when distances are measured precisely and trade is observed over a very fine grid.

Date of this Version

1-1-2005

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