Giri, Rahul (2008): Local Costs of Distribution, International Trade Costs and Micro Evidence on the Law of One Price.
Download (328Kb) | Preview
Observed trade flows provide one metric to gauge the degree of international goods market segmentation. Deviations from the law of one price provide another. New survey data on retail prices for a broad cross section of goods across 13 EU countries, compiled by Crucini, Telmer and Zachariadis (2005), show that (i) the average dispersion of law of one price deviations across all goods is 28 percent and (ii) the range of that dispersion across goods is large, varying from 2 percent to 83 percent. Quantitative multi-country Ricardian models, a la Eaton and Kortum, use data on bilateral trade volumes to estimate international trade barriers or trade costs. This paper investigates whether the degree of international goods market segmentation implied by these models can account for observed cross-country dispersion in prices. When heterogeneous and asymmetric trade costs are carefully calibrated to match observed bilateral trade volumes, the model can account for 85 percent of the average dispersion of law of one price deviations found in the data. However, it generates only 21 percent of the good by good variation in price dispersion. The model is augmented to permit heterogeneity in local costs of distribution - across goods and countries - and is calibrated to match data on distribution margins. While the augmented model can reproduce 96.5 percent of the average dispersion of law of one price deviations, it can match only 32 percent of the variation in that dispersion. Heterogeneity in trade costs, and in local distribution costs, cannot account for observed heterogeneity in the dispersion of law of one price deviations.
|Item Type:||MPRA Paper|
|Original Title:||Local Costs of Distribution, International Trade Costs and Micro Evidence on the Law of One Price|
|Keywords:||Trade, international trade costs, distribution costs, law of one price, price dispersion|
|Subjects:||F - International Economics > F1 - Trade > F15 - Economic Integration
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
F - International Economics > F1 - Trade > F10 - General
|Depositing User:||Rahul Giri|
|Date Deposited:||02. Sep 2008 07:00|
|Last Modified:||19. Feb 2013 03:56|
Alvarez, Fernando and Robert E. Lucas, “General Equilibrium Analysis of the Eaton-Kortum Model of International Trade,” Journal of Monetary Economics, September 2007, 54, issue 6, 1726–1768.
Atkeson, Andrew and Ariel Burstein, “Pricing-to-Market, Trade Costs, and International Relative Prices,” Working Paper, 2007.
Bergin, Paul R. and Reuven Glick, “Endogenous Tradability and Macroeconomic Implications,” Federal Reserve Bank of San Francisco, Working Paper Series. Working Paper 2003-09, 2006.
Betts, Caroline M. and Timothy J. Kehoe, “Tradability of Goods and Real Exchange Rate Fluctuations,” FRB Minneapolis Research Department Staff Report, 2001.
Burstein, Ariel T., Joao C. Neves, and Sergio Rebelo, “Distribution Costs and Real Exchange Rate Dynamics during Exchange-Rate-Based Stabilizations,” Journal of Monetary Economics, 2003, 50, 1189–1214.
Caselli, Francesco, “Accounting for Cross-Country Income Differences,” Handbook of Economic Growth, 2005. ed. by P. Aghion, and S. Durlauf.
Corsetti, Giancarlo and Luca Dedola, “A Macroeconomic Model of International Price Discrimination,” Journal of International Economics, 2005, 67, 129–155.
Crucini, Mario J., Chris I. Telmer, and Marios Zachariadis, “Understanding European Real Exchange Rates,” American Economic Review, June 2005, 95 (3), 724–738.
Cumby, Robert E., “Forecasting Exchange Rates and Relative Prices with the Hamburger Standard: Is What You Want What You Get with McParity,” National Bureau of Economic Research, Inc., NBER Working Papers: No. 5675, 1996.
Eaton, Jonathan and Samuel Kortum, “Technology, Geography, and Trade,” Econometrica, 2002, 70 (5), 1741–1779.
Engel, Charles and John H. Rogers, “European Product Market Integration after the Euro,” Economic Policy, 2004, 19 (39), 347–384.
Erceg, Christopher J. and Andrew T. Levin, “Structures and the Dynamic Behavior of the Real Exchange Rate.,” Mimeo, Board of Governors of the Federal Reserve System., 1996.
Feenstra, Robert C., Robert E. Lipsey, Haiyan Deng, Alyson C. Ma, and Hengyong Mo, “World Trade Flows: 1962-2000,” National Bureau of Economic Research, Inc., NBER Working Papers: No. 11040, January 2005.
Ghosh, Atish R. and Holger C. Wolf, “Pricing in International Markets: Lessons from The Economist,” National Bureau of Economic Research, Inc., NBER Working Papers: No. 4806, 1994.
Giovannini, Alberto, “Exchange Rates and Traded Goods Prices,” Journal of International Economics, February 1988, 24 (1/2), 45–68.
Goldberg, Linda and Jose Manuel Campa, “Distribution Margins, Imported Inputs, and the Sensitivity of the CPI to Exchange Rates,” National Bureau of Economic Research, Inc., NBER Working Papers: 12121, 2006.
Gollin, Douglas, “Getting Income Shares Right,” Journal of Political Economy, 2002, 110, 458–474.
Haskel, Jonathan and Holger Wolf, “The Law of One Price - A Case Study,” Scandinavian Journal of Economics, 2001, 103 (4), 545–58.
Heston, Alan, Robert Summers, and Bettina Aten, “Penn World Table Version 6.1,” Centre for International Comparisons at the University of Pennsylvania, 2002.
Hummels, David, “Toward a Geography of Trade Costs,” September 2001.
Isaard, Peter, “How Far Can We Push the Law of One Price?,” American Economic Review, December 1977, 67 (5), 942–948.
Knetter, Michael M., “Price Discrimination by U.S. and German Exporters,” American Economic Review, March 1989, 79 (1), 198–210.
Knetter, Michael M., “International Comparisons of Price-to-Market Behavior,” American Economic Review, June 1993, 83 (3), 473–486.
Lutz, Matthias, “Pricing in Segmented Markets, Arbitrage Barriers, and the Law of One Price: Evidence from The European Car Market,” Review of International Economics, 2004, 12 (3), 456–75.
Rogers, John H., “Price Level Convergence, Relative Prices, and Inflation in Europe,” Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers: No. 699, 2001.
Sanyal, Kalyan K. and Ronald W. Jones, “The Theory of Trade in Middle Products,” American Economic Review, March 1982, 72 (1), 16–31.
Waugh, Michael E., “International Trade and Income Differences,” June 2007.