In contrast to domestic trade, international trade inherently requires more intensive use of skilled labour with expertise in areas such as international business, language skills, and maritime insurance, and the transoceanic transportation is more capital intensive than the local transportation. In the presence of such bias in factor demands, globalization caused by an improvement in the export technologies can lead to a worldwide increase in the relative prices of the factors used intensively in international trade. Furthermore, a worldwide increase in the factors used intensively in international trade can lead to globalization. To capture these effects, we develop a flexible approach to model costly international trade, which includes the standard iceberg approach as a special case. More specifically, we extend the Ricardian model of trade with a continuum of goods by introducing multiple factors of production and by making technologies of supplying goods depend on whether the destination is home or abroad. If the technologies of supplying the same good to the two destinations differ only in total factor productivity, the model becomes isomorphic to the Ricardian model with the iceberg cost. By allowing the two technologies to differ in the factor intensities, our approach enables us to examine the links between factor endowments, factor prices, and globalization that cannot be captured by the iceberg approach.
ASJC Scopus subject areas
- Economics and Econometrics