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Uncertainty, arbitrage, and intra-industry trade

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<mark>Journal publication date</mark>11/2002
<mark>Journal</mark>Canadian Journal of Economics / Revue Canadienne d'Économique
Issue number4
Volume35
Number of pages9
Pages (from-to)757-785
<mark>State</mark>Published
<mark>Original language</mark>English

Abstract

When firms in the same industry located in different regions or countries experience shocks to production costs in their respective industries that are imperfectly correlated, arbitrage opportunities automatically lead to trade. Trade can either stabilize or destabilize the price faced by producers in a given country. Producers’ surplus is affected , owing to the ‘variance-covariance’ effect, while consumers’ surplus is more directly affected through the variance of the product price. We examine how consumers’ surplus, producers’ surplus, and social welfare are affected when the regions switch from autarky to free trade in the presence of industry and region-specific cost shocks.