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Price Equalization Does Not Imply Free Trade

Author

Listed:
  • Piyusha Mutreja
  • B. Ravikumar
  • Raymond Riezman
  • Michael J. Sposi

Abstract

In this article, the authors demonstrate the possibility of price equalization in a two-country world with barriers to international trade. For price equalization to occur when the countries are asymmetric, the country with higher productivity must also be the one with the lower trade barrier. A corollary of the authors? result is that small departures from purchasing power parity do not necessarily imply that world trade is mostly integrated.

Suggested Citation

  • Piyusha Mutreja & B. Ravikumar & Raymond Riezman & Michael J. Sposi, 2015. "Price Equalization Does Not Imply Free Trade," Review, Federal Reserve Bank of St. Louis, vol. 97(4), pages 323-339.
  • Handle: RePEc:fip:fedlrv:00050
    DOI: 10.20955/r.2015.323-39
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    References listed on IDEAS

    as
    1. Piyusha Mutreja & B. Ravikumar & Raymond Riezman & Michael J. Sposi, 2015. "Price Equalization Does Not Imply Free Trade," Review, Federal Reserve Bank of St. Louis, vol. 97(4), pages 323-339.
    2. 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.
    3. Armenter, Roc & Lahiri, Amartya, 2012. "Accounting for development through investment prices," Journal of Monetary Economics, Elsevier, vol. 59(6), pages 550-564.
    4. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
    5. Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 135-158, Fall.
    6. 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.
    7. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
    8. Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 135-158, Fall.
    9. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Relative Prices and Relative Prosperity," American Economic Review, American Economic Association, vol. 97(3), pages 562-585, June.
    10. Mutreja, Piyusha & Ravikumar, B. & Riezman, Raymond & Sposi, Michael, 2014. "Price equalization, trade flows, and barriers to trade," European Economic Review, Elsevier, vol. 70(C), pages 383-398.
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    Citations

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    Cited by:

    1. Piyusha Mutreja & B. Ravikumar & Raymond Riezman & Michael J. Sposi, 2015. "Price Equalization Does Not Imply Free Trade," Review, Federal Reserve Bank of St. Louis, vol. 97(4), pages 323-339.
    2. Mutreja, Piyusha & Ravikumar, B. & Riezman, Raymond & Sposi, Michael, 2014. "Price equalization, trade flows, and barriers to trade," European Economic Review, Elsevier, vol. 70(C), pages 383-398.
    3. Michael Sposi & B Ravikumar & Piyusha Mutreja, 2014. "Capital goods trade and economic development," 2014 Meeting Papers 1374, Society for Economic Dynamics.
    4. Mark A. Wynne, 2012. "Five Years of Research on Globalization and Monetary Policy: What Have We Learned?," Annual Report, Globalization and Monetary Policy Institute, Federal Reserve Bank of Dallas, pages 2-17.
    5. Michael J. Sposi, 2015. "Navigating the Structure of the Global Economy," Annual Report, Globalization and Monetary Policy Institute, Federal Reserve Bank of Dallas, pages 10-17.

    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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