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International Arbitrage and the Extensive Margin of Trade between Rich and Poor Countries

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  • Reto Foellmi
  • Christian Hepenstrick
  • Zweimüller Josef

Abstract

We incorporate consumption indivisibilities into the Krugman (1980) model and show that an importer's per capita income becomes a primary determinant of “export zeros”. Households in the rich North (poor South) are willing to pay high (low) prices for consumer goods; hence, unconstrained monopoly pricing generates arbitrage opportunities for internationally traded products. Export zeros arise because some northern firms abstain from exporting to the South, to avoid international arbitrage. Rich countries benefit from a trade liberalization, while poor countries lose. These results hold also under more general preferences with both extensive and intensive consumption margins. We show that a standard calibrated trade model (that ignores arbitrage) generates predictions on relative prices that violate no-arbitrage constraints in many bilateral trade relations. This suggests that international arbitrage is potentially important.

Suggested Citation

  • Reto Foellmi & Christian Hepenstrick & Zweimüller Josef, 2018. "International Arbitrage and the Extensive Margin of Trade between Rich and Poor Countries," Review of Economic Studies, Oxford University Press, vol. 85(1), pages 475-510.
  • Handle: RePEc:oup:restud:v:85:y:2018:i:1:p:475-510.
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    File URL: http://hdl.handle.net/10.1093/restud/rdx016
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    2. Anne-Célia Disdier & Carl Gaigné & Cristina Herghelegiu, 2018. "Do Standards Improve the Quality of Traded Products?," Working Papers ECARES 2018-38, ULB -- Universite Libre de Bruxelles.
    3. Foellmi, Reto & Hanslin Grossmann, Sandra & Kohler, Andreas, 2018. "A dynamic North-South model of demand-induced product cycles," Journal of International Economics, Elsevier, vol. 110(C), pages 63-86.
    4. Andreas Chai & Christian Kiedaisch & Nicholas Rohde, 2021. "The saturation of household spending diversity and emergent properties of representative households," DeFiPP Working Papers 2104, University of Namur, Development Finance and Public Policies.
    5. Carl Gaigné & Bruno Larue & Wendkouni Jean-Baptiste Zongo, 2021. "On export duration puzzles," Working Papers SMART 21-10, INRAE UMR SMART.
    6. Hartmut Egger & Simone Habermeyer, 2020. "How Preferences Shape the Welfare and Employment Effects of Trade," Working Papers 188, Bavarian Graduate Program in Economics (BGPE).
    7. Fensore, Irene & Legge, Stefan & Schmid, Lukas, 2017. "Human Barriers to International Trade," Economics Working Paper Series 1712, University of St. Gallen, School of Economics and Political Science.
    8. Kiminori Matsuyama, 2019. "Engel's Law in the Global Economy: Demand‐Induced Patterns of Structural Change, Innovation, and Trade," Econometrica, Econometric Society, vol. 87(2), pages 497-528, March.
    9. Fukuda, Katsufumi, 2019. "Effects of trade liberalization on growth and welfare through basic and applied researches," Journal of Macroeconomics, Elsevier, vol. 62(C).
    10. P. M. Picard & A. Tampieri, 2021. "Vertical differentiation and trade among symmetric countries," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1319-1355, June.
    11. Ulrich Schetter & Adrian Jäggi & Maik T. Schneider, 2021. "Inequality, Openness, and Growth through Creative Destruction," CID Working Papers 130a, Center for International Development at Harvard University.
    12. Habermeyer, Simone & Egger, Hartmut, 2019. "Nonhomothetic Preferences and Rent Sharing in an Open Economy," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203531, Verein für Socialpolitik / German Economic Association.
    13. Hartmut Egger & Simone Habermeyer, 2022. "How preferences shape the welfare and employment effects of trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 158(3), pages 815-853, August.
    14. Lashkaripour, Ahmad, 2020. "Discrete trade," Journal of International Economics, Elsevier, vol. 126(C).

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    More about this item

    Keywords

    Non-homothetic preferences; Parallel imports; Arbitrage; Extensive margin; Export zeros;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F19 - International Economics - - Trade - - - Other

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