Price Equalization Does Not Imply Free Trade

28 Pages Posted: 12 Feb 2013

See all articles by Piyusha Mutreja

Piyusha Mutreja

Syracuse University - Department of Economics

B. Ravikumar

Federal Reserve Bank of Saint Louis

Raymond G. Riezman

University of Iowa - Henry B. Tippie College of Business - Department of Economics; Aarhus University - Department of Economics and Business; University of California, Santa Barbara (UCSB) - Department of Economics; GEP; CESifo (Center for Economic Studies and Ifo Institute)

Michael Sposi

Southern Methodist University (SMU)

Multiple version iconThere are 3 versions of this paper

Date Written: January 31, 2013

Abstract

In this paper we show that price equalization alone is not sufficient to determine the barriers to international trade. There are many barrier combinations that deliver price equalization, but each combination implies a different volume of trade. We demonstrate this first theoretically in a simple two-country model. We then demonstrate the result quantitatively for the case of capital goods trade: barriers have to be large in order to be consistent with the observed trade flows even though our model implies that capital goods prices are similar across countries. Zero barriers to trade in capital goods will deliver price equalization in capital goods, but cannot reproduce the observed trade flows.

Keywords: international trade, capital goods trade

JEL Classification: F010, F020

Suggested Citation

Mutreja, Piyusha and Ravikumar, B. and Riezman, Raymond G. and Sposi, Michael, Price Equalization Does Not Imply Free Trade (January 31, 2013). CESifo Working Paper Series No. 4099. Available at SSRN: https://ssrn.com/abstract=2214922

Piyusha Mutreja

Syracuse University - Department of Economics ( email )

110 Eggers Hall
Department of Economics
Syracuse, NY 13244
United States

HOME PAGE: http://www.maxwell.syr.edu/econ/

B. Ravikumar

Federal Reserve Bank of Saint Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Raymond G. Riezman (Contact Author)

University of Iowa - Henry B. Tippie College of Business - Department of Economics ( email )

316 PBB
Iowa City, IA 52242
United States

HOME PAGE: http://www.biz.uiowa.edu/faculty/rriezman/

Aarhus University - Department of Economics and Business ( email )

Fuglesangs Alle 4
Aarus, 8210
Denmark

HOME PAGE: http://www.biz.uiowa.edu/faculty/rriezman/

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States

GEP ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

Michael Sposi

Southern Methodist University (SMU) ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

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