Staff Report 435

International Trade and Income Differences

Michael E. Waugh

Published September 23, 2009

I develop a novel view of the trade frictions between rich and poor countries by arguing that to reconcile bilateral trade volumes and price data within a standard gravity model, the trade frictions between rich and poor countries must be systematically asymmetric, with poor countries facing higher costs to export relative to rich countries. I provide a method to model these asymmetries and demonstrate the merits of my approach relative to alternatives in the trade literature. I then argue that these trade frictions are quantitatively important to understanding the large differences in standards of living and total factor productivity across countries.

Published In: American Economic Review (Vol. 100, No. 5, December 2010, pp. 2093-2124)

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