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Endogenous Tradability andMacroeconomic Implications
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Abstract
This paper advocates a new way of thinking about goods trade in an open economy macro
model. It develops a simple method for analyzing trade costs that are heterogeneous among a
continuum of goods, and it explores how these costs determine the endogenous decision by a
seller of whether to trade a good internationally. This way of thinking offers new insights
into international market integration and the behavior of international relative prices. As one
example, it provides a natural explanation for a prominent and controversial puzzle in
international macroeconomics regarding the surprisingly low degree of volatility in the
relative price of nontraded goods. Because tradedness is an endogenous decision, the good on
the margin forms a link holding together the prices of traded and nontraded goods. The paper
goes on to find that endogenizing trade has implications for other basic macroeconomic
issues.endogenizing trade, open economy macroeconomics