DOES SPACE MATTER - INTERNATIONAL COMPARISONS OF THE PRICES OF TRADABLES AND NONTRADABLES

One view of the consequence of trade among countries is that it tends to equalize prices of tradable goods in different countries. This pape r reexamines this view when both geographic proximity and trade flows are taken into account. Two hypotheses are presented. The first is tha t 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 wi ll have more similar prices. In both cases, this appears to be true fo r nontradables and even more so for low income countries. Additionally , much of the nontradable price difference can be captured by geograph ic variables. The implication is that a spatial component would enhanc e conventional approaches to the study of prices and incomes at the na tional level, particularly studies that include nontradable goods and services.