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The import price index with trade barriers: theory and evidence

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  • Thomas Brasch

    (Statistics Norway
    NUPI)

Abstract

The standard economic import price index hinges on an assumption of free trade. Applying the index to situations with barriers to trade yields biased results compared to a true import price index. To circumvent this problem, it is common to use average prices, such as unit values, as an aggregator function. However, the use of average prices is not rooted in economic theory. In this paper, I generalise the economic import price index to allow for barriers to trade in the form of quantity constraints. To illustrate the theoretical framework, I use the case of imports of textiles to Norway from 1988 to 1997. I find that a standard economic import price index, such as the Laspeyres index, grossly overstates import costs and that this bias is significantly reduced by using unit values.

Suggested Citation

  • Thomas Brasch, 2017. "The import price index with trade barriers: theory and evidence," Empirical Economics, Springer, vol. 52(1), pages 123-141, February.
    • Handle: RePEc:spr:empeco:v:52:y:2017:i:1:d:10.1007_s00181-015-1064-2
    DOI: 10.1007/s00181-015-1064-2
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    References listed on IDEAS

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    Cited by:

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    2. Pål Boug, 2017. "Exact and inexact decompositions of international price indices," Discussion Papers 868, Statistics Norway, Research Department.

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    More about this item

    Keywords

    Import prices; Price level; Index numbers; Trade;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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