Beyond Icebergs

We explore a flexible approach to model costly international trade, which includes the standard iceberg approach as a special case. To demonstrate our approach, we extend the Ricardian model of trade with a continuum of goods (Dornbusch, Fischer and Samuelson, 1977) by introducing multiple factors of production and by making technologies depend on destinations, i.e., whether they are supplied to the domestic market or the export market. If the two technologies differ only in total factor productivity, the model becomes isomorphic to the DFS Ricardian model with the iceberg cost. By allowing them to differ in the factor intensities, our approach enables us to explore the links between factor endowments, factor prices, and globalization that cannot be captured by the iceberg approach. 1For the contact information, go t