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A Multi-Country Approach to Factor-Proportions Trade and Trade Costs

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  • Markusen, James R.
  • Venables, Anthony J

Abstract

Classic trade questions are reconsidered by generalizing a factor-proportions model to multiple countries, multi-stage production, and country-specific trade costs. We derive patterns of production specialization and trade for a matrix of countries that differ in relative endowments (columns) and trade costs (rows). We demonstrate how the ability to fragment production and/or a proportional change in all countries’ trade costs alters these patterns. Production specialization and the volume of trade are higher with fragmentation for most countries but interestingly, for a large block of countries, these variables fall following fragmentation. Countries with moderate trade costs engage in market-oriented assembly, while those with lower trade costs engage in export-platform production. These two cases correspond to the concepts of horizontal and vertical affiliate production in the literature on multinational enterprises. Increases in specialization and the volume of trade accelerate as trade costs go to zero with and without fragmentation.

Suggested Citation

  • Markusen, James R. & Venables, Anthony J, 2005. "A Multi-Country Approach to Factor-Proportions Trade and Trade Costs," CEPR Discussion Papers 4872, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4872
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. James R. Markusen & Bridget Strand, 2007. "Trade in Business Services in General Equilibrium," NBER Working Papers 12816, National Bureau of Economic Research, Inc.
    2. Subhayu Bandyopadhyay & Sugata Marjit & Vivekananda Mukherjee, 2010. "Incidence of an outsourcing tax on intermediate inputs," Economics Bulletin, AccessEcon, vol. 30(2), pages 1271-1277.
    3. James Markusen, 2005. "Modeling the Offshoring of White-Collar Services: From Comparative Advantage to the New Theories of Trade and FDI," NBER Working Papers 11827, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    fragmentation; multi-country; multinationals; trade costs;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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