Understanding Interstate Trade Patterns

This paper models interstate trade patterns of U.S. states using a partial equilibrium trade model. The theoretical model deviates from the existing gravity literature by employing trade estimations in ratio form, with the ratio of imports from different sources, rather than the level of bilateral trade between two locations. Using this specification, together with considering the production side through technology levels, the elasticity of substitution across goods, the elasticity of substitution across varieties of each good, and the good specific elasticity of distance measures are all identified in the empirical analysis, which is not the case in gravity type studies. The ratio transformation also effectively eliminates any proportional distribution margin, international trade, or overstatement of distance measures from the theoretical trade equation. Compared to empirical international trade literature, the elasticity of substitution is estimated to be lower, while the elasticity of distance is estimated to be higher intranationally.