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Local costs of distribution, international trade costs and micro evidence on the law of one price

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  • Giri, Rahul
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    Abstract

    This paper connects trade flows to deviations from the law of one price (LOOP) in a structural model of trade and retailing. It accounts for the observed cross-country dispersion in prices of goods, based on retail price survey data, by focusing on two sources of goods market segmentation — (i) international trade costs, and (ii) non-traded input costs of distribution. I find that a multi-sector Ricardian trade model, ala Eaton–Kortum, augmented with a distribution sector, can account for the average price dispersion for a basket of goods fully and generates 70% of the variation in price dispersion across goods within the basket. While tradability of goods is important in explaining the average price dispersion for the basket of goods, distribution costs are important in explaining why, within the basket, some goods show more price dispersion than others.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0022199611001073
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Economics.

    Volume (Year): 86 (2012)
    Issue (Month): 1 ()
    Pages: 82-100

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    Handle: RePEc:eee:inecon:v:86:y:2012:i:1:p:82-100

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    Web page: http://www.elsevier.com/locate/inca/505552

    Related research

    Keywords: Trade; International trade costs; Distribution costs; Law of one price; Price dispersion;

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    References

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    Cited by:
    1. Betts, Caroline & Giri, Rahul & Verma, Rubina, 2013. "Trade, Reform, And Structural Transformation in South Korea," MPRA Paper 49540, University Library of Munich, Germany.
    2. Mario J. Crucini & Christopher I. Telmer, 2012. "Microeconomic Sources of Real Exchange Rate Variability," NBER Working Papers 17978, National Bureau of Economic Research, Inc.
    3. Michael Sposi, 2013. "Trade barriers and the relative price tradables," Globalization and Monetary Policy Institute Working Paper 139, Federal Reserve Bank of Dallas.

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