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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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References

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  1. Devashish Mitra & Vitor Trindade, 2003. "Inequality and Trade," NBER Working Papers 10087, National Bureau of Economic Research, Inc.
  2. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and Productivity in International Trade," Boston University - Institute for Economic Development 105, Boston University, Institute for Economic Development.
  3. Dow, James & Werlang, Sérgio Ribeiro da Costa, 1991. "Homothetic Preferences," Economics Working Papers (Ensaios Economicos da EPGE) 176, Graduate School of Economics, Getulio Vargas Foundation (Brazil).
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  8. University of Iowa & Michael E. Waugh, 2007. "International Trade and Income Differences," 2007 Meeting Papers 492, Society for Economic Dynamics.
  9. Matthew Potoski & Aseem Prakash, 2009. "Information asymmetries as trade barriers: ISO 9000 increases international commerce," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 28(2), pages 221-238.
  10. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, MIT Press, vol. 123(2), pages 441-487, 05.
  11. Kiminori Matsuyama, 1999. "A Ricardian Model with a Continuum of Goods under Non-homothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade," Discussion Papers 1241, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. Hunter, Linda, 1991. "The contribution of nonhomothetic preferences to trade," Journal of International Economics, Elsevier, vol. 30(3-4), pages 345-358, May.
  13. Chen, Maggie Xiaoyang & Otsuki, Tsunehiro & Wilson, John S., 2006. "Do standards matter for export success ?," Policy Research Working Paper Series 3809, The World Bank.
  14. Stokey, Nancy L, 1991. "The Volume and Composition of Trade between Rich and Poor Countries," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 63-80, January.
  15. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151 - 1199.
  16. Flam, Harry & Helpman, Elhanan, 1987. "Vertical Product Differentiation and North-South Trade," American Economic Review, American Economic Association, vol. 77(5), pages 810-22, December.
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  19. repec:bla:restud:v:74:y:2007:i:1:p:31-66 is not listed on IDEAS
  20. Hildegunn Kyvik Nordås & Enrico Pinali & Massimo Geloso Grosso, 2006. "Logistics and Time as a Trade Barrier," OECD Trade Policy Papers 35, OECD Publishing.
  21. Markusen, James R, 1986. "Explaining the Volume of Trade: An Eclectic Approach," American Economic Review, American Economic Association, vol. 76(5), pages 1002-11, December.
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Cited by:
  1. 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.

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