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.
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- Michael E. Waugh, 2010.
"International Trade and Income Differences,"
American Economic Review,
American Economic Association, vol. 100(5), pages 2093-2124, December.
- University of Iowa & Michael E. Waugh, 2007. "International Trade and Income Differences," 2007 Meeting Papers 492, Society for Economic Dynamics.
- Michael E. Waugh, 2009. "International trade and income differences," Staff Report 435, Federal Reserve Bank of Minneapolis.
- Ina Simonovska, 2009. "Income Differences and Prices of Tradables," 2009 Meeting Papers 692, Society for Economic Dynamics.
- Ina Simonovska, 2011. "Income Differences and Prices of Tradables," Working Papers 1015, University of California, Davis, Department of Economics.
- Ina Simonovska, 2010. "Income differences and prices of tradables," Globalization and Monetary Policy Institute Working Paper 55, Federal Reserve Bank of Dallas.
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