479. Trade between Similar Countries: Heterogeneous Entrepreneurs and Credit Market Imperfection

Sugata Marjit, School of Economics Discussion Paper No. 479 May 2013, School of Economics, The University of Queensland. Australia.

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Abstract

We build up a simple Ricardian trade model with imperfection in the market for credit which affects the pattern of production. Workers/entrepreneurs are endowed with different levels “capital” and need to borrow to produce the credit intensive good. We argue that in such a framework identical countries will gain from trade without the assumption of comparative advantage. Thus we show that we do not need monopolistically competitive models to generate trade between similar countries. Trade in this set up takes place in fragments and that helps alleviating credit constraints. Moreover, very poor firms and very rich ones are not likely to gain from trade in fragments, but the middle ones will.