Incorporating Transportation Costs Into International Trade Models: Theory and Application
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Incorporating Transportation Costs Into International Trade Models: Theory and Application

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    Is transportation a relevant variable? That’s probably not a relevant question for this audience, but certainly if you’ve taken a number of theory courses, like I have, you’ll recall that transportation didn’t come up very often. I recall in one of my early courses as an undergraduate, the professor, as usual, assumed zero transportation cost. A student asked how could that be true and what was meant by that. The professor replied that he meant exactly what he said, transportation costs are assumed to be zero. The student got up and walked out of the classroom and was never heard from again. We can sometimes get away by assuming transportation costs do not exist, but it depends on the context in which we make the assumption. Although I’ve spent a lot of time on transportation data for modeling purposes, because I think it’s important, if I were to go back to the classroom and teach trade, I don’t think I would dwell too much on transportation costs. It’s not necessary when trying to teach the essence of comparative advantage in trade. In fact, it can unnecessarily complicate things. In the classroom, we can teach a lot of good trade theory without real world complications regarding international transactions cost. Of course transportation is important; that’s why we are here today. The problem is that some teachers assume too often students will recognize why it’s not important in some circumstances but important in others.
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