A Multi-Country Approach to Factor-Proportions Trade and Trade Costs

51 Pages Posted: 10 Feb 2005 Last revised: 12 Sep 2022

See all articles by James R. Markusen

James R. Markusen

University of Colorado at Boulder - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Anthony J. Venables

University of Oxford; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: January 2005

Abstract

Classic trade questions are reconsidered by generalizing a factor-proportions model to multiple countries, multi-stage production, and country-specific trade costs. We derive patterns of production specialization and trade for a matrix of countries that differ in relative endowments (columns) and trade costs (rows). We demonstrate how the ability to fragment production and/or a proportional change in all countries' trade costs alters these patterns. Production specialization and the volume of trade are higher with fragmentation for most countries but interestingly, for a large block of countries, these variables fall following fragmentation. Countries with moderate trade costs engage in market-oriented assembly, while those with lower trade costs engage in export-platform production. These two cases correspond to the concepts of horizontal and vertical affiliate production in the literature on multinational enterprises. Increases in specialization and the volume of trade accelerate as trade costs go to zero with and without fragmentation.

Suggested Citation

Markusen, James R. and Venables, Anthony J., A Multi-Country Approach to Factor-Proportions Trade and Trade Costs (January 2005). NBER Working Paper No. w11051, Available at SSRN: https://ssrn.com/abstract=648953

James R. Markusen (Contact Author)

University of Colorado at Boulder - Department of Economics ( email )

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Anthony J. Venables

University of Oxford ( email )

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