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Per Capita Income, Market Access Costs, and Trade Volumes

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  • Tarasov, Alexander

Abstract

There is strong empirical evidence that countries with lower per capita income tend to have smaller trade volumes even after controlling for aggregate income. Furthermore, poorer countries do not just trade less, but have a lower number of trading partners. In this paper, I construct and estimate a general equilibrium model of trade that captures both these features of the trade data. There are two novelties in the paper. First, I introduce an association between market access costs and countries' development levels, which can account for the effect of per capita income on trade volumes and explain many zeros in bilateral trade flows. Secondly, I develop an estimation procedure, which allows me to estimate both variable and fixed costs of trade. I find that given the estimated parameters, the model performs well in matching the data. In particular, the predicted trade elasticity with respect to income per capita is close to that in the data.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19989.

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Date of creation: Nov 2008
Date of revision: Dec 2009
Handle: RePEc:pra:mprapa:19989

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Keywords: export zeros; fixed costs of trade; country extensive margin.;

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Cited by:
  1. repec:lmu:muenec:15421 is not listed on IDEAS
  2. Aleksandra Parteka & Massimo Tamberi, 2013. "Product Diversification, Relative Specialisation And Economic Development: Import-Export Analysis," GUT FME Working Paper Series A 15, Faculty of Management and Economics, Gdansk University of Technology.
  3. Christian Hepenstrick, 2010. "Per-capita incomes and the extensive margin of bilateral trade," IEW - Working Papers 519, Institute for Empirical Research in Economics - University of Zurich.
  4. Jaimovich, Esteban, 2012. "Import diversification along the growth path," Economics Letters, Elsevier, vol. 117(1), pages 306-310.
  5. Hepenstrick, Christian & Tarasov, Alexander, 2013. "Trade Openness and Cross-country Income Differences," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 402, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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