Working Paper

Trade barriers and the relative price tradables

Abstract: In this paper I quantitatively address the role of trade barriers in explaining why prices of services relative to tradables are positively correlated with levels of development across countries. I argue that trade barriers play a crucial role in shaping the cross-country pattern of specialization across many heterogenous tradable goods. The pattern of specialization feeds into cross-country productivity differences in the tradables sector and is reflected in the relative price of services. I show that the existing pattern of specialization implies that the tradables-sector productivity gap between rich and poor countries is more than 80 percent larger than it would be under free trade. In turn, removing trade barriers would eliminate 64 percent of the disparity in the relative price of services between rich and poor countries, without systematically altering the cross-country pattern of the absolute price of tradables.

JEL Classification: F1; O4;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2013

Number: 139

Pages: 48 pages

Note: Published as: Sposi, Michael (2015), "Trade Barriers and the Relative Price of Tradables," Journal of International Economics 92 (2): 398-411.