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Local comparative advantage: Trade costs and the pattern of trade

Listed author(s):
  • Alan V. Deardorff

type="main" xml:lang="en"> When there are costs of trade, such as transport or other costs, the pattern of trade may not be well described by the usual measures of comparative advantage, which simply compare a country's costs or autarky prices to those of the world. Instead, a better comparison takes into account the costs of trade. This paper shows first, in an example, how trade patterns can vary with costs of trade. It then provides restatements of the law of comparative advantage, first in a Ricardian model with trade costs, then extending a 1980 result due to Deardorff and to Dixit and Norman to include trade costs explicitly in a general framework. It uses this latter result to derive two correlations relating trade patterns to measures of comparative advantage that take account of both autarky prices and the costs of trade. Finally, the paper examines the solution to a trade model with product differentiation in order to make the potential role of trade costs more explicit, both algebraically and graphically. With product differentiation either by country or by firm, net trade in an industry, both bilaterally and globally, depends on a country's costs of both production and trade relative to an index of those costs for other countries.

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Article provided by The International Society for Economic Theory in its journal International Journal of Economic Theory.

Volume (Year): 10 (2014)
Issue (Month): 1 (March)
Pages: 9-35

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Handle: RePEc:bla:ijethy:v:10:y:2014:i:1:p:9-35
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  1. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  2. Bowen, Harry P & Leamer, Edward E & Sveikauskas, Leo, 1987. "Multicountry, Multifactor Tests of the Factor Abundance Theory," American Economic Review, American Economic Association, vol. 77(5), pages 791-809, December.
  3. Bergstrand, Jeffrey H, 1989. "The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 143-153, February.
  4. Debaere, P., 1998. ""Endowments Do Matter" Relative Factor Abundance and Trade," Working Papers 429, Research Seminar in International Economics, University of Michigan.
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  7. V. Deardorff, Alan, 2001. "Trade and Welfare Implications of Networks," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 16, pages 485-499.
  8. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1977. "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, American Economic Association, vol. 67(5), pages 823-839, December.
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  12. repec:fth:michin:429 is not listed on IDEAS
  13. Ronald W. Jones, 1961. "Comparative Advantage and the Theory of Tariffs: A Multi-Country, Multi-Commodity Model," Review of Economic Studies, Oxford University Press, vol. 28(3), pages 161-175.
  14. James E. Rauch, 2001. "Business and Social Networks in International Trade," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1177-1203, December.
  15. Alan Deardorff, 1998. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Chapters,in: The Regionalization of the World Economy, pages 7-32 National Bureau of Economic Research, Inc.
  16. Deardorff, Alan V, 1980. "The General Validity of the Law of Comparative Advantage," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 941-957, October.
  17. Dalia S Hakura, 1999. "A Test of the General Validity of the Heckscher-Ohlin Theorem for Trade in the European Community," IMF Working Papers 99/70, International Monetary Fund.
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