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Distorted trade barriers : a comment on “distorted gravity"
Author(s)
Date Issued
2010-06
Date Available
2010-12-14T14:35:42Z
Abstract
Since firm heterogeneity has been introduced into international trade models, the
importance of firm entry and exit (the extensive margin) has been highlighted. Thomas
Chaney (2008) illustrates how accounting for heterogenous firms (and this extensive
margin) alters the standard gravity equation. In particular, it reverses the previously
predicted effect the elasticity of substitution has on the elasticity of trade flows. Further,
Chaney shows that the elasticity of trade flows with respect to variable trade
costs is a constant. As is common, iceberg transport costs are used as the variable
trade barrier. However, in many empirical studies, ad valorem tariffs are also used as
a form of trade barrier, which as Cole (2010) points out, is not isomorphic to iceberg
transport cost in a monopolistically competitive setting. In this comment, I solve the
Chaney (2008) model using ad valorem tariffs instead of iceberg transport costs and
show the elasticity of trade flows with respect to tariffs is not constant, but depends
on the elasticity of substitution.
Sponsorship
Not applicable
Type of Material
Working Paper
Publisher
University College Dublin. School of Economics
Series
UCD Centre for Economic Research Working Paper Series
WP 10 19
Classification
F10
F12
F17
Subject – LCSH
Intra-industry trade--Econometric models
Monopolistic competition
Barriers to entry (Industrial organization)
Web versions
Language
English
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License
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