Trade Barriers and the Price of Nontradables Relative to Tradables

Michael J. Sposi

MPRA Paper from University Library of Munich, Germany

Abstract: This paper addresses the question of why the price of nontradables relative to tradables is positively correlated with income per worker. I construct a two-sector model in which agents differ with respect to managerial ability. Agents sort themselves by choosing to become a worker, a manager in nontradables, or a manager in tradables. A fixed cost of exporting places the most productive managers in the tradable sector, and the magnitude of the fixed cost determines the extent of this margin. Fixed costs together with trade costs determine the amount of competition across sectors which in turn determines prices across sectors. The calibrated model explains more than 60% of the cross-country differences in the relative price of nontradables, due to the presence of larger fixed costs in poor countries combined with nontrivial import costs.

Keywords: relative prices; PPP; tradables; nontradables; competition (search for similar items in EconPapers)
JEL-codes: F10 F12 F16 (search for similar items in EconPapers)
Date: 2010-12-01
New Economics Papers: this item is included in nep-int and nep-opm
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