Local Comparative Advantage: Trade Costs and the Pattern of Trade

University of Michigan Research Seminar in International Economics Working Paper No. 500

52 Pages Posted: 25 Apr 2004

See all articles by Alan V. Deardorff

Alan V. Deardorff

University of Michigan at Ann Arbor - Department of Economics; University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy

Date Written: February 27, 2004

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, transportation costs, trade costs

JEL Classification: F11

Suggested Citation

Deardorff, Alan V. and Deardorff, Alan V., Local Comparative Advantage: Trade Costs and the Pattern of Trade (February 27, 2004). University of Michigan Research Seminar in International Economics Working Paper No. 500, Available at SSRN: https://ssrn.com/abstract=510243 or http://dx.doi.org/10.2139/ssrn.510243

Alan V. Deardorff (Contact Author)

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