Department of Economics and Business Economics

Additive versus Multiplicative Trade Costs and the Gains from Trade Liberalizations

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This paper addresses welfare e¤ects from trade liberalization in a Melitz
(2003) heterogeneous-…rms trade model including the empirically important
per-unit (i.e. additive) trade costs in addition to the conventional iceberg
(i.e. multiplicative) and …xed trade costs. The novel contribution of the pa-
per 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 di¤erences
in intra-industry reallocations and in particular from dissimilar impacts on
the number of exporters (i.e., the extensive margin of trade).
Original languageDanish
JournalCanadian Journal of Economics
Pages (from-to)1032-1046
Number of pages15
Publication statusPublished - 2014

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