This paper derives a micro-founded gravity equation in general equilibrium based on a translog
demand system that allows for endogenous markups and substitution patterns across goods. In
contrast to standard CES-based gravity equations, trade is more sensitive to trade costs if the
exporting country only provides a small share of the destination country’s imports. As a result,
trade costs have a heterogeneous impact across country pairs, with some trade flows predicted to
be zero. I test the translog gravity equation and find strong empirical support in its favor
