ट्रांसपोर्टेशन कॉस्ट ऑफ ट्रेड इफेक्ट
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Answer:
Transportation costs, whether natural or man-made, introduce a band within which it is not worthwhile or profitable to arbitrage the differences in prices across localities. If it costs $100 to ship a ton of steel from one country to another, it does not matter to the buyers and sellers whether the $100 is due to true transportation costs or a man-made transportation costs such as a $100 tax on the importation or export of a ton of steel. If the difference in prices between the two localities ?$150 and the transportation costs are $100, there is $50 of arbitrage profits. The point is that only differences in excess of $100 will be arbitraged away. In contrast, differences in prices less than $100 between the two localities will not be worth arbitraging away.
The “transportation costs” as we have defined are also very important for the small economies. Recall that we argued that in an integrated economy, the global price is determined by the sum of the individual countries’ demand for and supply of goods and services. In the absence of transportation costs, the price will be the same in each and every locality. We also showed that a country’s impact on the global rice would be inversely related to its size. Hence the small economies will have little or no impact on the global price. Given the demand and supply elasticities, it follows that any induced increase in aggregate demand will have no impact on the global prices. As the price does not change as a result of the increase in the small country’s excess demand, production will not change in a meaningful way in any of the localities and there will be no price response. This means that the local excess demand will be satisfied through a net importation of the commodity in question. Therefore when all is said and done, the policy-induced excess demand results in a deterioration of the trade balance, no change in domestic production, and no effect on global prices or rates of return. The local policies will have little or no effect on the integrated, small open economy. The impact of the local policies will be felt on the small, open economy’s international accounts.