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

Wisarut Suwanprasert

The B.E. Journal of Theoretical Economics, 2019, vol. 19, issue 2, 16

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.

Keywords: gravity equation; international trade; per capita income; search frictions (search for similar items in EconPapers)
JEL-codes: F1 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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DOI: 10.1515/bejte-2017-0166

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