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Trade Barriers and the Price of Nontradables Relative to Tradables

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  • Sposi, Michael J.

Abstract

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.

Suggested Citation

  • Sposi, Michael J., 2010. "Trade Barriers and the Price of Nontradables Relative to Tradables," MPRA Paper 28385, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:28385
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    References listed on IDEAS

    as
    1. Ina Simonovska, 2009. "Income Differences and Prices of Tradables," 2009 Meeting Papers 692, Society for Economic Dynamics.
    2. Michael E. Waugh, 2010. "International Trade and Income Differences," American Economic Review, American Economic Association, vol. 100(5), pages 2093-2124, December.
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    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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