Price Equalization, Trade Flows, and Barriers to Trade

FRB of St. Louis Working Paper No. 2013-039C

30 Pages Posted: 20 May 2014 Last revised: 22 May 2014

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)

Date Written: May 21, 2014

Abstract

In this paper we show that price equalization does not imply zero barriers to 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 and then quantitatively for the case of capital goods trade in a multi-country model. To be quantitatively consistent with the observed capital goods trade flows across countries, our model implies that trade barriers must be large, yet our model delivers capital goods prices that are similar across countries. The absence of barriers to trade in capital goods delivers price equalization in capital goods but cannot reproduce the observed trade flows.

Keywords: Purchasing Power Parity, Capital Goods Prices, Bilateral Trade Flows, Trade Barriers

JEL Classification: F11, F21, F41

Suggested Citation

Mutreja, Piyusha and Ravikumar, B. and Riezman, Raymond G. and Sposi, Michael, Price Equalization, Trade Flows, and Barriers to Trade (May 21, 2014). FRB of St. Louis Working Paper No. 2013-039C. Available at SSRN: https://ssrn.com/abstract=2438961 or http://dx.doi.org/10.2139/ssrn.2438961

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 (Contact Author)

Federal Reserve Bank of Saint Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Raymond G. Riezman

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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