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Trade Barriers and the Price of Nontradables Relative to Tradables

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  • Sposi, Michael J.

Abstract

This paper addresses the question of why the price of nontradables relative to tradables is positively correlated with income per worker. I construct a two-sector model in which agents differ with respect to managerial ability. Agents sort themselves by choosing to become a worker, a manager in nontradables, or a manager in tradables. A fixed cost of exporting places the most productive managers in the tradable sector, and the magnitude of the fixed cost determines the extent of this margin. Fixed costs together with trade costs determine the amount of competition across sectors which in turn determines prices across sectors. The calibrated model explains more than 60% of the cross-country differences in the relative price of nontradables, due to the presence of larger fixed costs in poor countries combined with nontrivial import costs.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28385.

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Date of creation: 01 Dec 2010
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Handle: RePEc:pra:mprapa:28385

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Keywords: relative prices; PPP; tradables; nontradables; competition;

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  1. Ina Simonovska, 2010. "Income Differences and Prices of Tradables," NBER Working Papers 16233, National Bureau of Economic Research, Inc.
  2. Michael E. Waugh, 2010. "International Trade and Income Differences," American Economic Review, American Economic Association, vol. 100(5), pages 2093-2124, December.
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