How and Why Can Indirect Trade Benefit All Trading Countries? Indirect Comparative Advantage in Triangular Trade

Abstract:     
This paper studies why and how indirect trade can benefit the trading countries by using the concept of the indirect comparative advantage in indirect balance of trade. The paper demonstrates that the indirect comparative advantage determines the trade direction in the indirect balance of trade. This paper examines a typical indirect trade pattern: triangular trade. The paper demonstrates that gains from triangular trade based on the indirect comparative advantage can occur through third country indirectly, if the terms of trade fall in the limits set up by autarkic price ratios and relative international costs. The results of the paper imply that indirect trades and multilateral trades are better than no trade for all trading countries.

Keywords: Indirect comparative advantage, term of trade, Ricardo model, triangular trade, classical trade model

JEL Classifications: F1, F10

Working Paper Series