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Distorted Trade Barriers

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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. In fact, Chaney (2008) illustrates how accounting for this extensive margin and heterogenous firms alters the standard gravity equation; thereby reversing the previously predicted effect the elasticity of substitution has on the elasticity of trade flows. Furthermore, Cole (forthcoming) points out that ad valorem tariffs affect the extensive margin quite differently than the commonly used iceberg transport cost. In this paper, I show that the elasticity of trade flows with respect to tariffs is more elastic than that of iceberg transport costs. Thus, elasticity estimates derived from variables such as distance may underestimate the effect caused by a change in tariffs.

Suggested Citation

  • Matthew T. Cole, 2011. "Distorted Trade Barriers," Working Papers 201105, School of Economics, University College Dublin.
  • Handle: RePEc:ucn:wpaper:201105
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    File URL: http://hdl.handle.net/10197/6380
    File Function: First version, 2011
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    Cited by:

    1. Prehn, Sören & Brümmer, Bernhard, 2011. "'Distorted gravity: The intensive and extensive margins of international trade' revisited ; an application to an intermediate Melitz model," DARE Discussion Papers 1109, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
    2. Philipp J. H. Schröder & Allan Sørensen, 2014. "A Welfare Ranking of Multilateral Reductions in Real and Tariff Trade Barriers when Firms are Heterogenous," Review of International Economics, Wiley Blackwell, vol. 22(3), pages 423-443, August.
    3. Matthew T. Cole & Ben Zissimos, 2014. "Too Small To Protect? The Role of Firm Size in Trade Agreements," Working Papers 1410, Florida International University, Department of Economics.
    4. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2013. "Icebergs versus tariffs: A quantitative perspective on the gains from trade," University of Tuebingen Working Papers in Economics and Finance 53, University of Tuebingen, Faculty of Economics and Social Sciences.

    More about this item

    Keywords

    Intra-industry trade; Gravity; Firm heterogeneity; Monopolistic competition;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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