We consider a Heckscher-Ohlin model in which goods and factors of production can be traded, but trade involves transactions costs. Goods trade alone will not equalize factor prices, so there is an incentive for trade in factors of production. Whether goods or factors are traded depends on endowments and transactions costs. We characterize equilibria in which there is no trade, there is goods trade only, there is factor trade only, and there is trade in both goods and factors. This generalizes the Heckscher-Ohlin model to explain not only the direction of trade, but also the prior question of how goods and factors are partitioned to tradables and non-tradables.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
766.
Find related papers by JEL classification: F1 - International Economics - - Trade F10 - International Economics - - Trade - - - General F11 - International Economics - - Trade - - - Neoclassical Models of Trade F20 - International Economics - - International Factor Movements and International Business - - - General
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