Modelling Transport Costs in International Trade: A Comparison among Alternative Approaches
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We develop a general model to assess the pros and cons of the iceberg approach compared to alternative ways of modelling transportation in international trade. The main contributions of the literature are encompassed as special cases. Since iceberg costs are introduced in the Heckscher- Ohlin framework, the assessment is made in that framework. Iceberg costs imply restrictive assumptions on the transportation technology that have major reductive effects on most of the alluring results of that framework. Nonetheless they are defensible as a simple and elegant way of overcoming the endemic indeterminacy of that framework when dealing with more traded than non-traded goods. However, since iceberg costs are the workhorse model in many other situations where no problem of indeterminacy arises, we wonder whether the passive devotion to the iceberg approach is covering some of the most relevant issues that arise when trying to think realistically about the liberalization of world trade.Keywords:
Iceberg
Indeterminacy
Wonder
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International trade provides a channel with which the interaction, integration and partnership of countries can be attained and/or established. Despite the relevance of trade to national, regional and global economies, the documentation of these economic activities is sometimes inadequate such that it brings to question the validity of the generated data. Empirical scholars often find it difficult to analyze trade statistics with zero-trade values, especially in terms of finding natural logarithm. Researchers often deal with the zero trade statistics by employing the truncation method or censoring method. However, this has consequences for empirical analysis and policy formulation because there is information in the zero-value trade that will be lost if they are truncated from the dataset. Hence, the main challenge in the literature is the issue of the most appropriate and efficient empirical strategy for solving the problem of zero-trade values among available options. This has led to controversy in the literature with several proofs and reproofs, actions and reaction as well as counter-reaction. It is on this basis that this paper is situated to review the raging controversy on the solution to the consideration of zero values in trade statistics as applicable to positive trade analysis and/or modelling.
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A framework is developed which reduces to the three most popular models of international trade under different sets of assumptions. The key intuition is to focus on differences in per unit costs of production as determinants of trade patterns. This focus on per-unit costs clearly defines the links between between the Ricardian, the Hecksher-Ohlin, and the Economies of Scale Trade Theories. Examining the assumptions that are sufficient (but not necessary) for each case to hold provides a foundation which Facilitates student understanding. Students of international trade can see how these theories are inter-related, instead of viewing them in isolation as in the standard textbook expositions.
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Journal Article Transport costs and new economic geography Get access Philip McCann Philip McCann Search for other works by this author on: Oxford Academic Google Scholar Journal of Economic Geography, Volume 5, Issue 3, June 2005, Pages 305–318, https://doi.org/10.1093/jnlecg/lbh050 Published: 24 February 2005 Article history Received: 09 January 2003 Accepted: 10 August 2004 Published: 24 February 2005
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