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Endogenous Markup, Per Capita Income and Population Size in the Gravity Equation

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  • Suwanprasert Wisarut

    (Department of Economics and Finance, Middle Tennessee State University, MTSU Box 27, Murfreesboro, TN 37132)

Abstract

While recent studies use asymmetric trade costs and non-homothetic preference to explain why trade grows strongly with income per capita, this paper proposes a new explanation using a random search framework based on Burdett and Judd (1983). I show that the values of international trade flows as a share of income are generally larger in high-income countries because the markups in high-income countries are generally larger than those in low-income countries. In addition, firms’ price setting strategy creates an endogenous wedge between bilateral trade flow and gains from trade.

Suggested Citation

  • Suwanprasert Wisarut, 2019. "Endogenous Markup, Per Capita Income and Population Size in the Gravity Equation," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 19(2), pages 1-16, June.
    • Handle: RePEc:bpj:bejtec:v:19:y:2019:i:2:p:16:n:7
    DOI: 10.1515/bejte-2017-0166
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    References listed on IDEAS

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    Cited by:

    1. Jiangyuan Fu & Linyi Chen & Huidan Xue, 2023. "The Impacts of Trade Facilitation Provisions on Fresh Agricultural Products Trade between China and the BRI Countries," Agriculture, MDPI, vol. 13(2), pages 1-17, January.

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    More about this item

    Keywords

    gravity equation; international trade; per capita income; search frictions;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade

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