Price Equalization, Trade Flows, and Barriers to Trade

Piyusha Mutreja, B Ravikumar, Raymond Riezman and Michael Sposi

Working Papers from Federal Reserve Bank of St. Louis

Abstract: In this paper we show that price equalization does not imply zero barriers to trade. There are many barrier combinations that deliver price equalization, but each combination implies a different volume of trade. We demonstrate this first theoretically in a simple two-country model and then quantitatively for the case of capital goods trade in a multi-country model. To be quantitatively consistent with the observed capital goods trade flows across countries, our model implies that trade barriers must be large, yet our model delivers capital goods prices that are similar across countries. The absence of barriers to trade in capital goods delivers price equalization in capital goods but cannot reproduce the observed trade flows.

Keywords: capital goods trade; price equalization; barriers to trade (search for similar items in EconPapers)
JEL-codes: F11 F21 F41 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2014-05
Note: Publisher DOI: https://doi.org/10.1016/j.euroecorev.2014.05.005
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Published in European Economic Review

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Journal Article: Price equalization, trade flows, and barriers to trade (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:102140

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DOI: 10.20955/wp.2013.039

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