Publication Type
Encyclopaedia
Version
publishedVersion
Publication Date
1-2020
Abstract
This article reviews interrelated power-law phenomena in geography and trade. Given the empirical evidence on the gravity equation in trade flows across countries and regions, its theoretical underpinnings are reviewed. The gravity equation amounts to saying that trade flows follow a power law in distance (or geographic barriers). It is concluded that in the environment with firm heterogeneity, the power law in firm size is the key condition for the gravity equation to arise. A distribution is said to follow a power law if its tail probability follows a power function in the distribution’s right tail. The second part of this article reviews the literature that provides the microfoundation for the power law in firm size and reviews how this power law (in firm size) may be related to the power laws in other distributions (in incomes, firm productivity and city size).
Keywords
gravity equation, power law, firm size, city size, geography
Discipline
Economics | Finance
Research Areas
International Economics
Publication
Oxford Research Encyclopedia of Economics and Finance
First Page
1
Last Page
26
Identifier
10.1093/acrefore/9780190625979.013.296
Publisher
Oxford University Press
Citation
CHANG, Pao-Li and HSU, Wen-Tai.
Geography, trade and power-law phenomena. (2020). Oxford Research Encyclopedia of Economics and Finance. 1-26.
Available at: https://ink.library.smu.edu.sg/soe_research/2357
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1093/acrefore/9780190625979.013.296