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Price Equalization Does Not Imply Free Trade

Author

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

Abstract

In this paper we show that price equalization alone is not sufficient to determine the barriers to international trade. There are many barrier combinations that deliver price equalization, but each combination implies a different volume of trade. We demonstrate this first theoretically in a simple two-country model. We then demonstrate the result quantitatively for the case of capital goods trade: barriers have to be large in order to be consistent with the observed trade flows even though our model implies that capital goods prices are similar across countries. Zero barriers to trade in capital goods will deliver price equalization in capital goods, but cannot reproduce the observed trade flows.

Suggested Citation

  • Piyusha Mutreja & B. Ravikumar & Raymond Riezman & Michael J. Sposi, 2013. "Price Equalization Does Not Imply Free Trade," CESifo Working Paper Series 4099, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_4099
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp4099.pdf
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    References listed on IDEAS

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    1. Mutreja, Piyusha & Ravikumar, B. & Riezman, Raymond & Sposi, Michael J., 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. 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.
    9. 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.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Mutreja, Piyusha & Ravikumar, B. & Riezman, Raymond & Sposi, Michael J., 2015. "Price Equalization Does Not Imply Free Trade," Review, Federal Reserve Bank of St. Louis, vol. 97(4), pages 323-339.
    2. repec:fip:feddgm:00014 is not listed on IDEAS
    3. 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.
    4. Mutreja, Piyusha & Ravikumar, B. & Sposi, Michael J., 2014. "Capital goods trade and economic development," Globalization and Monetary Policy Institute Working Paper 183, Federal Reserve Bank of Dallas.
    5. repec:fip:feddgm:00030 is not listed on IDEAS

    More about this item

    Keywords

    international trade; capital goods trade;

    JEL classification:

    • F01 - International Economics - - General - - - Global Outlook
    • F02 - International Economics - - General - - - International Economic Order and Integration

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