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Openness is a Matter of Degree: How Trade Costs Reduce Demand Elasticities

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  • Adrian Wood (QEH)

Abstract

The relative costs of trading different goods vary much less than the relative costs of producing them. The costs of trade are also often high. In consequence, as this paper shows theoretically and with simulations, demand elasticities in open economies are much lower than substitution elasticities between different national varieties of goods. Output structures in open economies thus respond to variation of relative production costs in qualitatively the same way as in closed economies, in sharp contrast to what standard trade theory predicts, but the degree of responsiveness tends to be higher in countries with lower trade costs.

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File URL: http://www3.qeh.ox.ac.uk/RePEc/qeh/qehwps/qehwps169.pdf
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Paper provided by Queen Elizabeth House, University of Oxford in its series QEH Working Papers with number qehwps169.

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Handle: RePEc:qeh:qehwps:qehwps169

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  1. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
  2. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2007. "Comparative Advantage and Heterogeneous Firms," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 31-66.
  3. Peter K. Schott, 2003. "One Size Fits All? Heckscher-Ohlin Specialization in Global Production," American Economic Review, American Economic Association, vol. 93(3), pages 686-708, June.
  4. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
  5. Neary, J Peter, 1985. "International Factor Mobility, Minimum Wage Rates, and Factor-Price Equalization: A Synthesis," The Quarterly Journal of Economics, MIT Press, vol. 100(3), pages 551-70, August.
  6. Richard Baldwin & James Harrigan, 2007. "Zeros, Quality and Space: Trade Theory and Trade Evidence," NBER Working Papers 13214, National Bureau of Economic Research, Inc.
  7. Miklos Koren, 2004. "The law of two prices: trade costs and relative price variability," IEHAS Discussion Papers 0422, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  8. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
  9. Davis, D.R. & Weinstein, D.E., 1999. "An Account of Global Factor Trade," Working Papers 435, Research Seminar in International Economics, University of Michigan.
  10. Leamer, E.E., 1995. "The Heckscher-Ohlin Model in Theory and Practice," Princeton Studies in International Economics 77, International Economics Section, Departement of Economics Princeton University,.
  11. David Hummels & Alexandre Skiba, 2004. "Shipping the Good Apples Out? An Empirical Confirmation of the Alchian-Allen Conjecture," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1384-1402, December.
  12. Markusen, James R. & Venables, Anthony J., 2007. "Interacting factor endowments and trade costs: A multi-country, multi-good approach to trade theory," Journal of International Economics, Elsevier, vol. 73(2), pages 333-354, November.
  13. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
  14. Novy, Dennis, 2006. "Is the Iceberg Melting Less Quickly? International Trade Costs after World War II," The Warwick Economics Research Paper Series (TWERPS) 764, University of Warwick, Department of Economics.
  15. James E. Rauch & Vitor Trindade, 2003. "Information, International Substitutability, and Globalization," American Economic Review, American Economic Association, vol. 93(3), pages 775-791, June.
  16. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, vol. 85(5), pages 1029-46, December.
  17. Russell H. Hillberry, 2002. "Aggregation bias, compositional change, and the border effect," Canadian Journal of Economics, Canadian Economics Association, vol. 35(3), pages 517-530, August.
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Cited by:
  1. Adrian Wood (ODID), Joerg Mayer (UNCTAD), . "Has China de-industrialised other developing countries?," QEH Working Papers qehwps175, Queen Elizabeth House, University of Oxford.
  2. Adrian Wood (ODID), . "A practical Heckscher-Ohlin model," QEH Working Papers qehwps170, Queen Elizabeth House, University of Oxford.

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