Modeling Cultural Barriers in International Trade

14 Pages Posted: 28 Jun 2006

See all articles by István Kónya

István Kónya

Magyar Nemzeti Bank - Economics & Research Department

Abstract

The paper presents a model that analyzes the role of cultural differences in international trade. The decision to study foreign cultures and languages is incorporated into a simple trade model, which captures basic properties of cultural and language barriers. First, cultural costs differ from physical ones in that they can be eliminated by learning. Secondly, learning a language has economies of scale, thus smaller countries tend to invest more into learning. Thirdly, learning decisions within one country impose an externality on trading partners, since learning by one party makes communication easier also for the other one. This implies that learning decisions are in general inefficient, and the paper derives the connection between the equilibrium and optimal outcomes. Finally, because of the substitutability of learning among countries, a policy where a country subsidizes learning in the other nation - "cultural protectionism" - can be rationalized. Under certain conditions, such a policy can improve the welfare of both countries, in contrast to the case of regular export subsidies.

Suggested Citation

Konya, Istvan, Modeling Cultural Barriers in International Trade. Review of International Economics, Vol. 14, No. 3, pp. 494-507, August 2006. Available at SSRN: https://ssrn.com/abstract=912577 or http://dx.doi.org/10.1111/j.1467-9396.2006.00626.x

Istvan Konya (Contact Author)

Magyar Nemzeti Bank - Economics & Research Department ( email )

H-1850 Budapest
Hungary

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