Local Comparative Advantage: Trade Costs and the Pattern of Trade

Alan Deardorff

No 500, Working Papers from Research Seminar in International Economics, University of Michigan

Abstract: When there are costs of trade, such as transport or other costs, the pattern of trade may not be well described by the usual measures of comparative advantage, which simply compare a country’s costs or autarky prices to those of the world. Instead, a better comparison takes into account the costs of trade. This paper shows first, in an example, how trade patterns can vary with costs of trade. It then provides restatements of the Law of Comparative Advantage, first in a Ricardian model with trade costs. It then extends a result from Deardorff (1980) and Dixit and Norman (1980) to include trade costs explicitly in a more general framework. It uses this result to derive two correlations that relate trade patterns to measures of comparative advantage that take account of both autarky prices and the costs of trade. Finally, it examines the solution to a trade model with product differentiation in order to make the potential role of trade costs more explicit, both algebraically and graphically. With product differentiation either by country or by firm, net trade in an industry, both bilaterally and globally, depends on a country’s costs of both production and trade relative to an index of those costs for other countries.

Keywords: Comparative advantage; trade costs; transportation costs (search for similar items in EconPapers)
JEL-codes: F11 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (65)

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http://fordschool.umich.edu/rsie/workingpapers/Papers476-500/r500.pdf

Related works:
Journal Article: Local comparative advantage: Trade costs and the pattern of trade (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:mie:wpaper:500

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