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Price Equalization Does Not Imply Free Trade

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  • Piyusha Mutreja
  • B. Ravikumar
  • Raymond Riezman
  • Michael J. Sposi

Abstract

In this paper we show that price equalization alone is not sufficient to determine the barriers to international trade. There are many barrier combinations that deliver price equalization, but each combination implies a different volume of trade. We demonstrate this first theoretically in a simple two-country model. We then demonstrate the result quantitatively for the case of capital goods trade: barriers have to be large in order to be consistent with the observed trade flows even though our model implies that capital goods prices are similar across countries. Zero barriers to trade in capital goods will deliver price equalization in capital goods, but cannot reproduce the observed trade flows.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2013/wp-cesifo-2013-01/cesifo1_wp4099.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4099.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4099

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Keywords: international trade; capital goods trade;

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References

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  1. R. Dornbusch & S. Fischer & P. A. Samuelson, 1976. "Comparative Advantage, Trade and Payments in a Ricardian Model With a Continuum of Goods," Working papers 178, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. University of Iowa & Michael E. Waugh, 2007. "International Trade and Income Differences," 2007 Meeting Papers 492, Society for Economic Dynamics.
  3. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
  4. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
  5. Piyusha Mutreja & B. Ravikumar & Raymond Riezman & Michael Sposi, 2012. "Price equalization does not imply free trade," Globalization and Monetary Policy Institute Working Paper 129, Federal Reserve Bank of Dallas.
  6. Chang-Tai Hsieh & Peter J. Klenow, 2003. "Relative Prices and Relative Prosperity," NBER Working Papers 9701, National Bureau of Economic Research, Inc.
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Cited by:
  1. Piyusha Mutreja & B. Ravikumar & Raymond Riezman & Michael J. Sposi, 2013. "Price Equalization Does Not Imply Free Trade," CESifo Working Paper Series 4099, CESifo Group Munich.

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