International Trade and Income Differences
Federal Reserve Bank of Minneapolis Staff Report No. 435
Posted: 30 Oct 2009
Date Written: October 28, 2009
I develop a novel view of the trade frictions between rich and poor countries by arguing that to reconcile bilateral trade volumes and price data within a standard gravity model, the trade frictions between rich and poor countries must be systematically asymmetric, with poor countries facing higher costs to export relative to rich countries. I provide a method to model these asymmetries and demonstrate the merits of my approach relative to alternatives in the trade literature. I then argue that these trade frictions are quantitatively important to understanding the large differences in standards of living and total factor productivity across countries.
Keywords: trade, income, bilateral, trade costs
JEL Classification: F, F1, O4
Suggested Citation: Suggested Citation