Measuring and decomposing trade costs

Editor: Richard Pomfret, University of Adelaide, Australia


International trade theory now routinely includes trade costs, i.e. the different cost (in money, time and uncertainty) of domestic and international trade, and it is widely recognized that trade costs are more complex than the simple iceberg assumption that x% of a good's value "melts" during international trade.  However, measurement of trade costs remains rudimentary; estimation is often by backing trade costs out of gravity equation estimates or by assuming a relationship to the ratio of domestic and international trade flows, rather than by direct measurement.

Trade costs are neither constant nor simple.  It is widely believed that they have a fixed and a variable component whose relative importance influences whether trade increases at the intensive or extensive margin.  It is also recognized that quality is relevant ("shipping out the good apples") and that mode of transport matters.  However, our empirical knowledge of these relationships is limited.

Topics include, but are not restricted to:

  • measuring and explaining the size of trade costs,
  • fixed versus variable trade costs, and their impact on intensive and extensive trade margins,
  • the importance of distance, mode of transport, etc.


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