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General Trading Costs in Pure Theory of International Trade

Author

Listed:
  • Sugata Marjit
  • Biswajit Mandal

Abstract

We use the HOS model of international trade to find a link between trading (including domestic trading or retailing) costs and pattern of trade, not just its effect on volume of trade. Even if we use symmetric iceberg type trading costs, unlike conventional unit cost approach, we generate relative price effects and prove that higher trading costs in labor-abundant countries will restrict volume of world trade by working against factor endowment bias and conversely for the capital-abundant nation if the trading sector is labor intensive and vice versa. Asymmetric trading cost between goods may have paradoxical output effects. Relatively capital-abundant country will be worse off with increasing trading cost, whereas once engaged in trade the labor-abundant country may gain from further increase in trading cost.
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Suggested Citation

  • Sugata Marjit & Biswajit Mandal, 2009. "General Trading Costs in Pure Theory of International Trade," DEGIT Conference Papers c014_011, DEGIT, Dynamics, Economic Growth, and International Trade.
    • Handle: RePEc:deg:conpap:c014_011
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    File URL: http://degit.sam.sdu.dk/papers/degit_14/c014_011.pdf
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • F1 - International Economics - - Trade

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