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Beyond Icebergs: Towards a Theory of Biased Globalization

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  • Kiminori Matsuyama

Abstract

In contrast to domestic trade, international trade inherently requires more intensive use of skilled labour with expertise in areas such as international business, language skills, and maritime insurance, and the transoceanic transportation is more capital intensive than the local transportation. In the presence of such bias in factor demands, globalization caused by an improvement in the export technologies can lead to a worldwide increase in the relative prices of the factors used intensively in international trade. Furthermore, a worldwide increase in the factors used intensively in international trade can lead to globalization. To capture these effects, we develop a flexible approach to model costly international trade, which includes the standard iceberg approach as a special case. More specifically, we extend the Ricardian model of trade with a continuum of goods by introducing multiple factors of production and by making technologies of supplying goods depend on whether the destination is home or abroad. If the technologies of supplying the same good to the two destinations differ only in total factor productivity, the model becomes isomorphic to the Ricardian model with the iceberg cost. By allowing the two technologies to differ in the factor intensities, our approach enables us to examine the links between factor endowments, factor prices, and globalization that cannot be captured by the iceberg approach. Copyright 2007, Wiley-Blackwell.

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File URL: http://hdl.handle.net/10.1111/j.1467-937X.2007.00420.x
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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 74 (2007)
Issue (Month): 1 ()
Pages: 237-253

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Handle: RePEc:oup:restud:v:74:y:2007:i:1:p:237-253

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  1. Robert C. Feenstra, 2000. "Introduction to "The Impact of International Trade on Wages"," NBER Chapters, in: The Impact of International Trade on Wages, pages 1-11 National Bureau of Economic Research, Inc.
  2. Robert C. Feenstra, 2000. "The Impact of International Trade on Wages," NBER Books, National Bureau of Economic Research, Inc, number feen00-1, July.
  3. Maurice Obstfeld & Kenneth Rogoff, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Working Papers 7777, National Bureau of Economic Research, Inc.
  4. Paolo Epifani & Gino Gancia, 2004. "Increasing Returns, Imperfect Competition and Factor Prices," Working Papers 210, Barcelona Graduate School of Economics.
  5. Mathias Thoenig & Thierry Verdier, 2003. "A Theory of Defensive Skill-Biased Innovation and Globalization," American Economic Review, American Economic Association, vol. 93(3), pages 709-728, June.
  6. Paolo Epifani & Gino Gancia, 2004. "The skill bias of world trade," Economics Working Papers 833, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2007.
  7. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1977. "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, American Economic Association, vol. 67(5), pages 823-39, December.
  8. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  9. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  10. Deardorff, Alan V, 1980. "The General Validity of the Law of Comparative Advantage," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 941-57, October.
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