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Additive versus multiplicative trade costs and the gains from trade liberalizations
Author(s) -
Sørensen Allan
Publication year - 2014
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/caje.12101
Subject(s) - economics , multiplicative function , openness to experience , free trade , gains from trade , margin (machine learning) , welfare , trade barrier , unit (ring theory) , commercial policy , fixed cost , international economics , international trade , microeconomics , computer science , mathematics , psychology , social psychology , mathematical analysis , market economy , mathematics education , machine learning
This paper addresses welfare effects from trade liberalization in a Melitz ([Melitz, M.J., 2003]) heterogeneous‐firms trade model including the empirically important per‐unit (i.e., additive) trade costs in addition to the conventional iceberg (i.e., multiplicative) and fixed trade costs. The novel contribution of the paper is the result that the welfare gain for a given increase in trade openness is higher for reductions in per‐unit (additive) trade costs than for reductions in iceberg (multiplicative) trade costs. The ranking derives from differences in intra‐industry reallocations and, in particular, from dissimilar impacts on the number of exporters (i.e., the extensive margin of trade).