The determinants of bilateral trade |
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Authors: | Huiwen Lai Susan Chun Zhu† |
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Institution: | SAS Institute Inc.; Department of Economics, Michigan State University |
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Abstract: | Abstract. In this paper we present a monopolistic competition model that incorporates asymmetric trade barriers and international differences in production costs. The model implies a highly non‐linear bilateral trade equation. Estimation of this equation yields parameters for the elasticity of substitution and trade costs that are more reasonable than those found in previous studies. A simulation indicates that trade liberalization will shift trade from rich countries to poor countries and from within continental trading partners with preferential trade agreements to intercontinental trading partners. JEL Classification: F1 |
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