International arbitrage and the extensive margin of trade between rich and poor countries*

Abstract

We incorporate consumption indivisibilities into the Krugman (1980) model and show that an importer's per capita income becomes a primary determinant of "export zeros". Households in the rich North (poor South) are willing to pay high (low) prices for consumer goods; hence, unconstrained monopoly pricing generates arbitrage opportunities for internationally traded products. Export zeros arise because some northern firms abstain from exporting to the South, to avoid international arbitrage. Rich countries benefit from a trade liberalization, while poor countries lose. These results hold also under more general preferences with both extensive and intensive consumption margins. We show that a standard calibrated trade model (that ignores arbitrage) generates predictions on relative prices that violate noarbitrage constraints in many bilateral trade relations. This suggests that international arbitrage is potentially important.

Engel's Law in the Global Economy: Demand‐Induced Patterns of Structural Change, Innovation, and Trade

“…This could be achieved in a variety of ways. For example, one could use a horizontally differentiated monopolistic competition model with non‐CES, similar to Bertoletti and Etro (), Zhelobodko et al (), Simonovska (), Foellmi, Hepenstrick, and Zweimüller (), or others. Alternatively, one could use a vertically differentiated model of intra‐industry trade, such as Flam and Helpman (), Stokey (), or Fajgelbaum, Grossman, and Helpman ().…”

“…See Parenti, Thisse, and Ushchev () and Thisse and Ushchev () for unified treatments. Some studies in this literature explore the implications on intra‐industry trade; see Behrens and Murata (), Bertoletti, Etro, and Simonovska (), Foellmi, Hanslin, and Kohler (), Foellmi, Hepenstrick, and Zweimüller (), and Simonovska (). By departing from the CES aggregator by introducing nonhomotheticity, these models generate some income effects on the nature of monopolistic competition and intra‐industry trade that are absent in the Dixit–Stiglitz–Krugman model of trade.…”

Nonhomothetic Preferences and Rent Sharing in an Open Economy

“…The trade structure effects in Proposition 1 are well in line with the Linder (1961) hypothesis, which postulates that manufacturing trade is higher between countries featuring more similar per-capita income levels. Whereas the Linder (1961) hypothesis is sometimes used as a rationale for explaining higher levels of overall trade between countries that are more similar in terms of per-capita income (Foellmi et al, 2018), this conclusion is not immediate in a two-sector model. It is well understood from previous work that a higher similarity in per-capita income increases intra-industry trade (see Markusen, 1986;Bergstrand, 1990), but the positive trade stimulus is counteracted by a decline in inter-industry trade (cf.…”

Market access implications of non‐tariff measures: Estimates for four developed country markets

“…We examine the effect of NTMs on the “extensive margin” of trade, in terms of the probability that bilateral trade in particular products will occur between countries. The extensive margin of trade is an important area of focus in the theoretical and empirical trade literature (see Bernard, Jensen, Redding, & Schott, ; Debaere & Mostashari, ; Feenstra & Ma, ; Felbermayr & Kohler, ; Foellmi, Hepenstrick, & Zweimuller, ; Santos Silva, Tenreyro, & Wei, ). Changes to the extensive margin have been shown to have important implications for international trade.…”