Domestic trading costs and pure theory of international trade

Abstract

Abstract We use the HOS (Heckscher–Ohlin–Samuelson) model of international trade to find a link between trading (in particular domestic trading or retailing or domestic transport cost) costs, pattern of trade and volume of trade. Even if we use symmetric iceberg type trading costs, we generate relative price effects and prove that higher trading costs in labor‐abundant countries will restrict the volume of world trade and conversely for the capital‐abundant nation. Asymmetric trading cost between goods may have paradoxical output effects. A relatively capital‐abundant country will be worse off with increasing trading cost, whereas the labor‐abundant country may gain from further increases in trading cost.

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