Trade Barriers and the Price of Nontradables Relative to Tradables

Sposi, Michael J. (2010): Trade Barriers and the Price of Nontradables Relative to Tradables.

Abstract

This paper addresses the question of why the price of nontradables relative to tradables is positively correlated with income per worker. I construct a two-sector model in which agents differ with respect to managerial ability. Agents sort themselves by choosing to become a worker, a manager in nontradables, or a manager in tradables. A fixed cost of exporting places the most productive managers in the tradable sector, and the magnitude of the fixed cost determines the extent of this margin. Fixed costs together with trade costs determine the amount of competition across sectors which in turn determines prices across sectors. The calibrated model explains more than 60% of the cross-country differences in the relative price of nontradables, due to the presence of larger fixed costs in poor countries combined with nontrivial import costs.

• Item Type: MPRA Paper
• Language: English
• Keywords: relative prices; PPP; tradables; nontradables; competition
• Subjects: F - International Economics > F1 - Trade > F16 - Trade and Labor Market Interactions; F - International Economics > F1 - Trade > F10 - General; F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation

References

Alfaro, L., Charlton, A., Kanczuk, F., 2008. Plant-size distribution and cross-country income differences. Working paper.

Aliprantis, C.D., Border, K.C., 2007. Infinite Dimensional Analysis: A Hitchhiker's Guide. Springer, New York. 3rd edition.

Aumann, R.J., 1976. An elementary proof that integration preserves uppersemicontinuity. Journal of Mathematical Economics 3, 15-18.

Balassa, B., 1964. The purchasing-power parity doctrine: A reappraisal. Journal of Political Economy 72, 584-596.

Bernard, A.B., Eaton, J., Jenson, J.B., Kortum, S., 2003. Plants and productivity in international trade. American Economic Review 93, 1268-1290.

Bhagwati, J.N., 1984. Why are services cheaper in the poor countries? Economic Journal 94, 279-286.

Bhattacharya, D., 2009. Aggregate Barriers, Establishment Size and Economic Development. Job market paper. University of Iowa.

Buera, F.J., Kaboski, J.P., Shin, Y., 2010. Finance and development: A tale of two sectors. Forthcoming: American Economic Review.

Chang, Y., 2000. Wages, business cycles, and comparative advantage. Journal of Monetary Economics 46, 143-171.

Codognato, G., Ghosal, S., 2003. On existence of undominated pure strategy Nash equilibria in anonymous nonatomic games: A generalization. International Journal of Game Theory 31, 493-498.

Feenstra, R.C., Lipsey, R.E., Deng, H., Ma, A.C., Mo, H., 2005. World Trade Flows: 1962-2000. NBER Working Papers 11040.

Guner, N., Ventura, G., Yi, X., 2008. Macroeconomic Implications of Size-Dependent Policies. Review of Economic Dynamics 11, 721-744.

Herrendorf, B., Valentinyi, A., 2010. Which sectors make poor countries so unproductive? Forthcoming: Journal of the European Economic Association.

Heston, A., Nuxoll, D.A., Summers, R., 1994. The differential-productivity hypothesis and purchasing-power parities: Some new evidence. Review of Inernational Economics 2, 227-243.

Heston, A., Summers, R., Aten, B., 2002. Penn World Table version 6.1. Discussion paper, Center for International Comparisons at the University of Pennsylvania.

Jehle, G.A., Reny, P., 2000. Advanced Microeconomic Theory. Addison Wesley. 2nd edition.

Klein, E., Thompson, A.C., 1984. Theory of Correspondences: Including Applications to Mathematical Economics. Canadian Mathematical Society Series of Monographs and Advanced Texts, John Wiley and Sons, New York.

Kravis, I.B., Lipsey, R.E., 1988. National price levels and the prices of tradables and nontradables. American Economic Review: Papers and Proceedings 78, 474-478.

Lucas, R.E., 1978. On the Size Distribution of Business Firms. Bell Journal of Economics 9, 508-523.

Melitz, M.J., 2003. The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica 71, 1695-1725.

Obstfeld, M., Rogo, K., 2000. The six major puzzles in international macroeconomics: Is there a common cause? NBER Macroeconomics Annual 15, 339-390.

Rogoff, K., 1996. The purchasing power parity puzzle. Journal of Economics Literature 34, 647-668.

Samuelson, P.A., 1964. Theoretical notes on trade problems. Review of Economics and Statistics 46, 145-154.

Simonovska, I., 2008. Income Differences and Prices of Tradables. Job market paper. University of Minnesota.

UNIDO, 1996-. International Yearbook of Industrial Statistics. United nations Industrial Development Organization.

Waugh, M.E., 2009. International Trade and Income Differences. Research Department Sta Report 435. Federal Reserve Bank of Minneapolis. Forthcoming: American Economic Review.