Local Costs of Distribution, International Trade Costs and Micro Evidence on the Law of One Price
Observed trade flows provide one metric to gauge the degree of international goods market segmentation. Deviations from the law of one price provide another. New survey data on retail prices for a broad cross section of goods across 13 EU countries, compiled by Crucini, Telmer and Zachariadis (2005), show that (i) the average dispersion of law of one price deviations across all goods is 28 percent and (ii) the range of that dispersion across goods is large, varying from 2 percent to 83 percent. Quantitative multi-country Ricardian models, a la Eaton and Kortum, use data on bilateral trade volumes to estimate international trade barriers or trade costs. This paper investigates whether the degree of international goods market segmentation implied by these models can account for observed cross-country dispersion in prices. When heterogeneous and asymmetric trade costs are carefully calibrated to match observed bilateral trade volumes, the model can account for 85 percent of the average dispersion of law of one price deviations found in the data. However, it generates only 21 percent of the good by good variation in price dispersion. The model is augmented to permit heterogeneity in local costs of distribution - across goods and countries - and is calibrated to match data on distribution margins. While the augmented model can reproduce 96.5 percent of the average dispersion of law of one price deviations, it can match only 32 percent of the variation in that dispersion. Heterogeneity in trade costs, and in local distribution costs, cannot account for observed heterogeneity in the dispersion of law of one price deviations.
Trade Reform and Structural Transformation: Evidence from Six Great Liberalizations (Joint with Caroline Betts, Rubina Verma and Ergin Bayrak).
We investigate the relationship between trade liberalization and structural transformation for a sample of six countries. We document the key policies adopted during the large trade liberalizations which took place in Chile, China, India, Indonesia, Mexico and Turkey during the sample period 1965 through 2005. We quantify the impact of the trade liberalizations for the allocation of employment and output by sector, and for the composition of exports, imports, and total trade. We find that trade liberalization is associated with substantial de-agriculturalization, growth in the employment, value added, and trade and export shares of industry and services, and in most cases with a significant increase in the rate of economic growth as measured by increases in the growth rate of GDP per capita. We develop a two-country, three sector general equilibrium model to assess whether the patterns of structural transformation observed in the data can be accounted for by trade liberalization. Specifically, we carefully calibrate the model to data from each of our six countries and ask the question: would the observed patterns of structural transformation in these countries have occurred in the absence of the reduction in trade costs implied by the growth of trade post-liberalization?
Wage Inequality and Structural Change: Evidence from the U.S.
There has been a dramatic increase in the wage of college graduates (skilled labor) relative to the wage of high school graduates (unskilled labor) in the U.S. after 1980, and especially during the period 1980-1990. At the same time, the quantity of skilled labor relative to that of unskilled labor has also increased. The data also reveals that in the post-war U.S. economy there has been a shift of resources (labor and capital) from the industrial sector to the service sector. Using individual level data from Current Population Survey (CPS) and disaggregated industry level data from Bureau of Economic Analysis (BEA), this paper investigates the link between the rise of service sector and the rise in wage inequality. Evidence shows that the reallocation of capital from industry to service sector played an important role in determining the growth and direction of change of wage inequality. The objective of the paper is to develop a three factor, two sector general equilibrium model to generate the structural change observed in the U.S. economy along with the rising wage inequality. I ask the following question - what would be the growth in skill premium in the absence of reallocation of capital?
