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Distorted trade barriers : a comment on “distorted gravity"

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  • Matthew T. Cole

Abstract

Since firm heterogeneity has been introduced into international trade models, the importance of firm entry and exit (the extensive margin) has been highlighted. Thomas Chaney (2008) illustrates how accounting for heterogenous firms (and this extensive margin) alters the standard gravity equation. In particular, it reverses the previously predicted effect the elasticity of substitution has on the elasticity of trade flows. Further, Chaney shows that the elasticity of trade flows with respect to variable trade costs is a constant. As is common, iceberg transport costs are used as the variable trade barrier. However, in many empirical studies, ad valorem tariffs are also used as a form of trade barrier, which as Cole (2010) points out, is not isomorphic to iceberg transport cost in a monopolistically competitive setting. In this comment, I solve the Chaney (2008) model using ad valorem tariffs instead of iceberg transport costs and show the elasticity of trade flows with respect to tariffs is not constant, but depends on the elasticity of substitution.

Suggested Citation

  • Matthew T. Cole, 2010. "Distorted trade barriers : a comment on “distorted gravity"," Working Papers 201019, School of Economics, University College Dublin.
  • Handle: RePEc:ucn:wpaper:201019
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    File URL: http://hdl.handle.net/10197/2653
    File Function: First version, 2010
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    Cited by:

    1. Matthew Cole, 2011. "Not all trade restrictions are created equally," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 147(3), pages 411-427, September.

    More about this item

    Keywords

    Intra-industry trade; Gravity; Firm heterogeneity; Monopolistic competition; Intra-industry trade--Econometric models; Monopolistic competition; Barriers to entry (Industrial organization);

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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