Explaining time variation in geographic price dispersion

The pattern of price dispersion significantly varies over time and across locations. Using a detailed dataset with product-level retail prices, we examine the role of time-varying factors in shaping the time variation of price dispersion. We find that price dispersion variation in an integrated region is mainly driven by oil prices, while the variation in a segmented region is attributed to dispersion in real income. We also find that dispersion in value-added tax rates explains a significant portion of price dispersion fluctuations in both geographic dimensions. This paper offers new evindence on the trade-off that exists for the role of time-varying factors as contributors to price dispersion variation by highlighting their relative importance across different dimensions of economic geography.     

Monopoly,intermediate goods and the pure theory of international trade

Conclusion In a model with two traded good sectors between which intersectoral flows of intermediate goods are allowed and with a monopolized non-traded good sector, the wage rate in terms of two traded goods increases and the rental of capital in terms of two traded goods decreases when the price of relatively more labor intensive traded good sector increases, though nothing definite can be said about the direction of change in the wage rate and rental in terms of the non-traded good. When prices of traded goods are kept constant and labor and/or capital increase(s), output of the non-traded good sector increases provided that the non-traded good is not inferior, having income elasticity of demand less than unity. The factor intensity condition for the traded goods is in general not sufficient for the validity of the Rybczynski theorem to hold with respect to net outputs of the traded goods. We have derived sufficient conditions for the magnification effect to be observed with respect to net outputs of the traded good sectors. Specifically, we have shown that the factor intensity condition (23) is sufficient for the magnification effect to prevail when only labor increases.     

Non-linearities in international prices

We consider multiple sources of non-linearity in good-level law-of-one-price deviations across the globe using a structural model that accounts for previously omitted variables and allows estimation of good-level convergence rates both within and outside the bands of no trade. Accounting for the role of theoretically implied variables and their non-linear interactions in the convergence process of law-of-one-price deviations, we find that good-level convergence rates are systematically faster compared with convergence estimates based on reduced-form models. Contrary to conventional wisdom, good-level price differentials exhibit mean-reverting behaviour even within the bands of no trade. Moreover, mean-reversion rates are strongly related to economic characteristics such as tradability and a good's non-traded input content.     

Strategic Regulation Policy in the Internet

Some countries are importers while others are exporters of global backbone connectivity. At the same time, input components such as local access are non-traded. This paper analyzes a non-cooperative regulatory game between importing and exporting countries, assuming that the prices of both traded and non-traded inputs can be regulated. We show that exporting countries choose a more restrictive regulation of non-traded goods than importing countries do. We further show that a requirement of international non-discrimination may hurt importing countries, and give firms producing traded inputs incentives to invest in quality degradation.     

Energy prices,substitution, and optimal borrowing in the short run: An analysis of adjustment in oil importing developing countries

The paper discusses optimal short-term borrowing in response to an increase in the price of imported inputs. The rationale for borrowing lies in the increase in substitution possibilities in production (between imported and domestic inputs) and in consumption (between traded and non-traded goods) as the economy adjusts its structure to the new prices. A typology of LDCs and the oil price increases in the 70's are used to illustrate the results of the model, which are compared with the actual increase in borrowing during the period.     

A DYNAMIC MODEL OF TOURISM, EMPLOYMENT AND WELFARE: THE CASE OF HONG KONG

Abstract.  The present paper uses a dynamic open-economy model with wage indexation to examine the impact of tourism on employment and welfare. Both short-run and long-run situations are analysed. It is well known that tourism converts non-traded goods into tradable goods. An increase in the demand for a non-traded good raises its relative price, which results in an expansion of the non-traded sector at the expense of the traded goods sector. This output shift raises labour employment in the short run. However, in the long run, the higher relative price leads to higher wages, resulting in a negative impact on labour employment. If the output effect is dominant, the expansion in tourism raises employment and welfare. However, under realistic conditions tourism may lower both labour employment and welfare due to rising costs. These results are demonstrated by simulating a dynamic model for the case of Hong Kong.     

Persistence of prices in the Eurozone capital cities: Evidence from the Economist Intelligence Unit City Data

Using the Economist Intelligence Unit City Data, this paper studies price differences in the Eurozone by comparing the prices of individual goods between twelve Eurozone countries. To estimate the persistence of prices, I employ a cross-sectionally augmented panel unit root test that accounts for contemporaneous as well as serial correlation. Based on the test, the estimated half-lives are 13 months for traded goods and 16 months for non-traded goods. Price differences for certain traded goods such as food or cars revert to parity much faster than prices for alcohol. To further refine the persistence estimates, I use the sequential panel selection method to determine the stationarity of individual cross-sections for each good that rejects the unit root. The distribution of stationary cross-sections between the Eurozone countries appears fairly balanced. The half-lives based only on stationary-cross-sections are reduced to 6 months for traded goods and 7 months for non-traded goods.     

More on tariffs and non-traded goods

The general equilibrium effects of a small tariff on relative prices are analysed within a demand and supply model which provides further insights into Dornbusch's (1974) results. It is shown that the elasticity of the price of non-traded goods with respect to the tariff is a weighted average of the degree of substitutability between non-traded goods and importables on the supply side and that on the demand side. When complementarity is ruled out, the price of non-traded goods increases with the tariff, but less than proportionally.     

Local Import Competition in a Lumpy Country

This paper examines the effects of a fall in the price of an imported good in a region of a country that is specialized in producing that good. The context is a “lumpy country” model in which factors are unable to move between locations, although in this case I assume that only labor is immobile, and that the other factor, capital, is perfectly mobile between regions. With mobile capital, the lumpy-country equilibrium can be anywhere in the factor-price equalization set, but my focus is on a region that initially produces only one good, on the border of that set. When the price of that good falls due to import competition, it would be possible for both factors to reallocate partially into production of the other good, but I assume instead that some capital simply leaves the region, so that it continues to produce only the same good that it did before. The result of this is a fall in the real wage of labor, just as under Stolper-Samuelson assumptions. I then look at production also of a non-traded good, and find that the same import competition that cheapened the traded good also cheapens the nontraded good. The result is that the region shrinks, losing capital and producing less of both goods unless the substitution in favor of the nontraded good expands its consumption out of a smaller income.     

Foreign ownership, non-traded goods and the effects of terms of trade changes on national welfare

This paper extends the theory of international trade in the presence of foreign ownership to incorporate non-traded goods. It is shown that, with non-traded goods, national and aggregate welfare might move in opposite directions in response to a terms of trade deterioration even when national and aggregate trade specialization patterns coincide.     

Skilled-unskilled wage inequality and unemployment: A general equilibrium analysis

The paper develops a static three sector competitive general equilibrium model of a small open economy in which skilled labor is mobile between a traded good sector and the non-traded good sector and unskilled labor is specific to another traded good sector. Capital is perfectly mobile among all these three sectors. We introduce involuntary unemployment equilibrium in both the labor markets and explain unemployment using efficiency wage hypothesis. We examine the effects of change in different factor endowments and prices of traded goods on the unemployment rates and on the skilled-unskilled relative wage. Also, we introduce Gini-Coefficient of wage income distribution as a measure of wage income inequality; and show that a comparative static effect may force the skilled-unskilled relative wage and the Gini-Coefficient of wage income distribution to move in opposite directions in the presence of unemployment.     

Non-Traded Goods and Real Exchange Rate Fluctuations: A Structural VAR Analysis

Real exchange rate variance decompositions indicate that only a small fraction of real exchange rate movements can be attributed to changes in the relative price between traded and non-traded goods. This paper argues that those exercises, by ignoring the nature of the shocks behind real exchange rate changes, may be inadequate to measure the relative importance of non-traded goods prices. Instead, it proposes using a structural vector autoregression (SVAR) model to study the effects of shocks to the relative supply and relative demand for non-traded goods on the real exchange rate. The SVAR model is identified via long-run restrictions and is estimated for a group of advanced economies. The results indicate that for some countries, relative supply shocks can be a significant source of real exchange rate fluctuations.     

TOURISM, TAXES AND IMMISERIZATION: A TRADE THEORETIC ANALYSIS

Abstract.   Many countries promote tourism as a device for earning foreign exchange and promoting domestic welfare and growth. In all these countries the non-traded goods (internationally not traded) are consumed by both domestic residents and tourists. It is well known that the relative price of non-traded goods and services is determined in the local market – hence the tourist demand results in monopoly power in trade for the host country. We use a very simple two-country model to demonstrate the specific nature of the offer curve and the trade equilibrium and the difficulties of taxation.     

Development policies in the presence of unemployment and non-traded intermediate goods

The role of non-traded intermediate goods has not been satisfactorily studied in the context of a developing economy with involuntary unemployment. In this paper we examine this phenomenon within the framework of a Harris-Todaro-type migration model. We show that the presence of the intermediate good creates a strong linkage between the rural and urban regions. Under certain reasonable assumptions on factor intensities, this linkage causes an increase in the price of the urban good to benefit the intermediate good as well, and an expansion in the urban output to drive an expansion in the production of the intermediate good. Finally, wage subsidies to urban firms increase the unemployment rate, despite the ameliorating effect of the inter-sectoral linkage.We would like to thank M. Ali Khan, Bela Balassa, Will Carrington, and the members of the J. H. U. Trade and Development and Summer Seminars for advice and comments. We would also like to thank two anonymous referees for pointing out several errors in an earlier draft. Any remaining errors are, of course, ours.     

Quality-enhancing trade liberalization

This paper examines the effect of trade liberalization on the quality of industrial goods produced by a developing country. The intermediate goods used as inputs to industrial production are assumed to be non-traded and produced by firms with market power. It is shown here that for a certain range of human capital levels, exposure to free trade, instead of resulting in de-industrialization, can raise welfare through an improvement in the quality of domestically produced industrial goods.     

Purchasing power parity and uncovered interest parity: The Spanish case

This paper examines whether the purchasing power parity (PPP) hypothesis holds in the long run when traded and non-traded goods are distinguished. Moreover, this hypothesis is analyzed jointly with the uncovered interest parity (UIP). The period from January 1986 to December 1995 was studied using monthly data corresponding to the consumer price index, short- and long-term interest rates, and spot exchange rates for Portugal, France, Italy, Germany, and Great Britain with each relative to Spain. Using Johansen's multi-equational cointegration technique, it was found that PPP does not hold even with the explicit consideration of the distinction between traded and non-traded goods as well as the difference between domestic and foreign interest rates. Furthermore, these two factors generate a systematic deviation between exchange rates and PPP.     

差异化产品价格战的产生与扩散机制分析

本文基于消费者的"0-1"购买特征和产品的纵向差异化特征,建立了一个新的价格战模型。通过应用数学证明和数值模拟的方法发现:(1)合谋体系、背叛体系以及价格战体系的均衡结果均与需求冲击无关;(2)差异化产品厂商的背叛动机以及产品链条的合谋稳定性也与需求冲击无关;(3)产品的差异化程度是影响合谋稳定性的重要因素,差异化程度越大,合谋越稳定;(4)合谋集团对背叛厂商的惩罚策略存在着"误伤效应",这种效应在一定条件下能够自我抑制,表现为产品链条上的价格战和合谋共存,在其他条件下,这种效应不能自我抑制,价格战一旦发动就会迅速扩散到整个产品链条。     

Real exchange rate dynamics in the presence of non-traded goods and transaction costs

This paper studies the role of non-traded goods and transaction costs in accounting for the puzzling behavior of real exchange rates. We show that introducing the transaction costs and non-traded goods in an otherwise standard competitive model dramatically improves its ability to rationalize observed real exchange rate dynamics.     

International migration,non-traded goods and economic welfare in the source country: a comment

"Labor emigration redistributes income in a two factor, two good economy where one good is internationally non-traded. Labor's nominal wage rises as nominal capital payments fall. Recent research has shown that the prices of non-traded goods rise, causing society's welfare to decline. Here the induced change in the real income of each factor is considered separately. There is an ambiguity with regard to the real income of non-emigrating labor. If labor spends a relatively small fraction of income on the non-traded goods, its real income may rise, even though society suffers the loss of welfare."     

Border region panel evidence on PPP deviations

This article examines prices for 32 identical menu items sold by restaurant franchises operating on both sides of the border between El Paso in the US and Ciudad Juárez in Mexico from July 1997 to June 2008. The relationship between Real Exchange Rate (RER) volatility and the degree of price convergence is examined within a panel data context. The city-pair and goods selected provide a unique experiment in which distance, tradability and industry considerations are set aside and the extent of RER volatility is the only factor to influence price convergence. We find nonmonotonic relationships between mean reversion and RER volatility: very fast adjustments for both low and high volatility panels of goods (between 1 and 2 months) and slower half-lives (between 3 and 4 months) at moderate levels of uncertainty. These figures are, however, substantially smaller than the 6 or 7 months reported in previous research for general US–Mexico goods, suggesting the very strong price convergence observed along the US–Mexican border.