Trade Barriers and the Price of Nontradables Relative to Tradables
This paper addresses the question of why the price of nontradables relative to tradables is positively correlated with income per worker. I construct a two-sector model in which agents differ with respect to managerial ability. Agents sort themselves by choosing to become a worker, a manager in nontradables, or a manager in tradables. A fixed cost of exporting places the most productive managers in the tradable sector, and the magnitude of the fixed cost determines the extent of this margin. Fixed costs together with trade costs determine the amount of competition across sectors which in turn determines prices across sectors. The calibrated model explains more than 60% of the cross-country differences in the relative price of nontradables, due to the presence of larger fixed costs in poor countries combined with nontrivial import costs.
|Date of creation:||01 Dec 2010|
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ina Simonovska, 2010.
"Income differences and prices of tradables,"
Globalization and Monetary Policy Institute Working Paper
55, Federal Reserve Bank of Dallas.
- University of Iowa & Michael E. Waugh, 2007.
"International Trade and Income Differences,"
2007 Meeting Papers
492, Society for Economic Dynamics.
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