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Local Comparative Advantage: Trade Costs and the Pattern of Trade

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  • Alan V Deardorff

    (University of Michigan)

Abstract

When there are costs of trade, such as transport or other costs, the pattern of trade may not be well described by the usual measures of comparative advantage, which simply compare a country’s costs or autarky prices to those of the world. Instead, a better comparison takes into account the costs of trade. This paper shows first, in an example, how trade patterns can vary with costs of trade. It then provides restatements of the Law of Comparative Advantage, first in a Ricardian model with trade costs. It then extends a result from Deardorff (1980) and Dixit and Norman (1980) to include trade costs explicitly in a more general framework. It uses this result to derive two correlations that relate trade patterns to measures of comparative advantage that take account of both autarky prices and the costs of trade. Finally, it examines the solution to a trade model with product differentiation in order to make the potential role of trade costs more explicit, both algebraically and graphically. With product differentiation either by country or by firm, net trade in an industry, both bilaterally and globally, depends on a country’s costs of both production and trade relative to an index of those costs for other countries.

Suggested Citation

  • Alan V Deardorff, 2004. "Local Comparative Advantage: Trade Costs and the Pattern of Trade," Working Papers 500, Research Seminar in International Economics, University of Michigan.
  • Handle: RePEc:mie:wpaper:500
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    File URL: http://fordschool.umich.edu/rsie/workingpapers/Papers476-500/r500.pdf
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    References listed on IDEAS

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    1. 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.
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    More about this item

    Keywords

    Comparative advantage; trade costs; transportation costs;

    JEL classification:

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

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