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Additive versus multiplicative trade costs and the gains from trade

Author

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  • Allen Sørensen

    () (Department of Economics and Business, Aarhus University, Denmark)

Abstract

This paper addresses welfare effects from trade liberalization in a heterogeneous-fi?rms trade model including the empirically important per-unit (i.e. additive) trade costs in addition to the conventional iceberg (i.e. multiplicative) and fi?xed trade costs. The novel contribution of the paper is the result that the welfare gain for a given increase in trade openness is higher for reductions in per-unit (additive) trade costs than for reductions in iceberg (multiplicative) trade costs. The ranking derives from differences in intra-industry reallocations and in particular from dissimilar impacts on the number of exporters (i.e., the extensive margin of trade).

Suggested Citation

  • Allen Sørensen, 2012. "Additive versus multiplicative trade costs and the gains from trade," Economics Working Papers 2012-07, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:aarhec:2012-07
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    File URL: ftp://ftp.econ.au.dk/afn/wp/12/wp12_07.pdf
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    Keywords

    iceberg trade costs; per-unit;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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