Vertical specialization and the border effect puzzle

No 05-24, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: A large body of empirical research finds that a pair of regions within a country tends to trade 10 to 20 times as much as an otherwise identical pair of regions across countries. In the context of the standard trade models, the large ?border effect? is problematic, because it is consistent only with high elasticities of substitution between goods and/or high unobserved national border barriers. The author proposes a resolution to this puzzle based on vertical specialization, which occurs when regions or countries specialize only in particular stages of a good?s production sequence. The author develops a Ricardian model of intra-national and international trade, and shows how endogenous vertical specialization magnifies the effects of border barriers such as tariffs. He calibrates the model to match relative wages, trade shares, and vertical specialization for the U.S. and Canada. The model implies a much smaller border barrier and border effect than previous estimates.

Keywords: Consumption (Economics); Trade (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-ifn and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... ers/2005/wp05-24.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:05-24

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().