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Per capita income, market access costs, and trade volumes

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  • Tarasov, Alexander

Abstract

There is strong empirical evidence that countries with lower per capita income tend to have smaller trade volumes even after controlling for aggregate income. Furthermore, poorer countries do not just trade less, but have a lower number of trading partners. In this paper, I construct and estimate a general equilibrium model of trade that captures both these features of the trade data. The key element of the model is an association between trade costs (both variable and fixed) and countries’ development levels, which can account for the effect of per capita income on trade volumes and explain many zeros in bilateral trade flows. I find that market access costs play an important role in fitting the model to the data. In a counterfactual analysis, I find that removing the asymmetries in trade costs raises welfare in all countries with an average percentage change equal to 29\% and larger gains for smaller and poorer countries. Real income inequality falls by 43\%.

Suggested Citation

  • Tarasov, Alexander, 2012. "Per capita income, market access costs, and trade volumes," Munich Reprints in Economics 19577, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenar:19577
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    References listed on IDEAS

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    Cited by:

    1. Christian Hepenstrick & Alexander Tarasov, 2015. "Trade Openness and Cross-country Income Differences," Review of International Economics, Wiley Blackwell, vol. 23(2), pages 271-302, May.
    2. Parteka, Aleksandra & Tamberi, Massimo, 2013. "Product diversification, relative specialisation and economic development: Import–export analysis," Journal of Macroeconomics, Elsevier, vol. 38(PA), pages 121-135.
    3. Jaimovich, Esteban, 2012. "Import diversification along the growth path," Economics Letters, Elsevier, vol. 117(1), pages 306-310.
    4. Christian Hepenstrick & Alexander Tarasov, 2015. "Per capita income and the extensive margin of bilateral trade," Canadian Journal of Economics, Canadian Economics Association, vol. 48(4), pages 1561-1599, November.
    5. repec:eee:iburev:v:26:y:2017:i:6:p:1034-1050 is not listed on IDEAS
    6. Eugene Bempong Nyantakyi & Steven Husted & Shuichiro Nishioka, 2015. "Trade Frictions and Market Access of Developing Countries: A Product-level Empirical Investigation," Review of International Economics, Wiley Blackwell, vol. 23(5), pages 924-945, November.
    7. repec:pit:wpaper:521 is not listed on IDEAS
    8. Mallick, Sushanta & Marques, Helena, 2016. "Pricing strategy of emerging market exporters in alternate currency regimes: The role of comparative advantage," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 68-81.
    9. Xiaohua Bao, 2014. "How Do Technical Barriers to Trade Affect China's Imports?," Review of Development Economics, Wiley Blackwell, vol. 18(2), pages 286-299, May.
    10. repec:lmu:muenec:15421 is not listed on IDEAS

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    JEL classification:

    • F1 - International Economics - - Trade

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