Does Space Matter? International Comparisons of the Prices of Tradables and Nontradables

Abstract

One view of the consequence of trade among countries is that it tends to equalize prices of tradable goods in different countries. This paper reexamines this view when both geographic proximity and trade flows are taken into account. Two hypotheses are presented. The first is that distance is more strongly associated with countries' relative prices than the extent of trade between them. The second hypothesis is that, at given income levels, countries that are strong trading partners will have more similar prices. In both cases, this appears to be true for nontradables and even more so for low income countries. Additionally, much of the nontradable price difference can be captured by geographic variables. The implication is that a spatial component would enhance conventional approaches to the study of prices and incomes at the national level, particularly studies that include nontradable goods and services.