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

  • James R. Markusen
  • Anthony J. Venables

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.

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File URL: http://www.nber.org/papers/w11051.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11051.

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Date of creation: Jan 2005
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Publication status: published as Markusen, James R. & Venables, Anthony J., 2007. "Interacting factor endowments and trade costs: A multi-country, multi-good approach to trade theory," Journal of International Economics, Elsevier, vol. 73(2), pages 333-354, November.
Handle: RePEc:nbr:nberwo:11051
Note: ITI
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  1. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
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  3. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
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  10. David Hummels & Dana Rapoport & Kei-Mu Yi, 1998. "Vertical specialization and the changing nature of world trade," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 79-99.
  11. Ng, Francis & Yeats, Alexander, 1999. "Production sharing in East Asia : who does what for whom, and why?," Policy Research Working Paper Series 2197, The World Bank.
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  14. Ronald W. Jones, 2000. "Globalization and the Theory of Input Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 026210086x, June.
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  18. John Luke Gallup & Jeffrey D. Sachs & Andrew D. Mellinger, 1998. "Geography and Economic Development," Harvard Institute of Economic Research Working Papers 1856, Harvard - Institute of Economic Research.
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