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General Trading Costs in Pure Theory of International Trade

  • Sugata Marjit
  • Biswajit Mandal

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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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c014_011.

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Length: 22 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:deg:conpap:c014_011
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  1. Chakrabarti, Avik, 2004. "Asymmetric adjustment costs in simple general equilibrium models," European Economic Review, Elsevier, vol. 48(1), pages 63-73, February.
  2. Didier Laussel & Raymond Riezman, 2006. "Fixed Transport Costs and International Trade," CESifo Working Paper Series 1764, CESifo Group Munich.
  3. Alan V. Deardorff, 2014. "Local comparative advantage: Trade costs and the pattern of trade," International Journal of Economic Theory, The International Society for Economic Theory, vol. 10(1), pages 9-35, 03.
  4. Jones, R.W. & Marjit, S., 1992. "International Trade and Endogenous Production Structures," RCER Working Papers 312, University of Rochester - Center for Economic Research (RCER).
  5. Marjit, Sugata & Beladi, Hamid, 1999. "Complementarity between Import Competition and Import Promotion," Journal of Economic Theory, Elsevier, vol. 86(2), pages 280-285, June.
  6. Bhagwati, Jagdish N, 1982. "Directly Unproductive, Profit-seeking (DUP) Activities," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 988-1002, October.
  7. Limao, Nuno & Venables, Anthony J., 1999. "Infrastructure, geographical disadvantage, and transport costs," Policy Research Working Paper Series 2257, The World Bank.
  8. Bernard, Andrew B. & Jensen, J. Bradford & Schott, Peter K., 2006. "Trade costs, firms and productivity," Journal of Monetary Economics, Elsevier, vol. 53(5), pages 917-937, July.
  9. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Boston College Working Papers in Economics 593, Boston College Department of Economics.
  10. Ronald W. Jones, 1965. "The Structure of Simple General Equilibrium Models," Journal of Political Economy, University of Chicago Press, vol. 73, pages 557.
  11. Marjit, Sugata, 2007. "Trade theory and the role of time zones," International Review of Economics & Finance, Elsevier, vol. 16(2), pages 153-160.
  12. Cassing, James H, 1978. "Transport Costs in International Trade Theory: A Comparison with the Analysis of Nontraded Goods," The Quarterly Journal of Economics, MIT Press, vol. 92(4), pages 535-50, November.
  13. James E. Anderson, 1999. "Why Do Nations Trade (So Little)?," Boston College Working Papers in Economics 428, Boston College Department of Economics.
  14. Marjit, Sugata & Beladi, Seyed Abdolhamid, 1997. "Protection and the gainful effects of foreign capital," Discussion Papers, Series II 334, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
  15. Falvey, Rodney E, 1976. "Transport Costs in the Pure Theory of International Trade," Economic Journal, Royal Economic Society, vol. 86(343), pages 536-50, September.
  16. Fink, Carsten & Mattoo, Aaditya & Neagu, Ileana Cristina, 2002. "Assessing the impact of communication costs on international trade," Policy Research Working Paper Series 2929, The World Bank.
  17. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, vol. 85(5), pages 1029-46, December.
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