The Effect of Economic Integration on the Duration of Trade

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: The aim of this paper is to empirically investigate if there is a correlation between the duration of trade and economic integration. Theoretically, this is done by analyzing how economic integration affects sunk costs of exporting. Using the Kaplan-Meier methodology we calculate survival probabilities for German and Russian imports. Import data is derived at the 2-digit product level from 1993-2008 for Germany and from 1996-2008 for Russia. Our results show that Russia experiences longer duration than Germany. We argue that economic integration affects sunk costs of exporting, which in turn affects the duration of trade. As Germany is more integrated in the global economy, their market is characterized by low sunk costs. The Russian market, on the other hand, is characterized by a lower level of economic integration and thereby also higher sunk costs. The conclusion we reach is that economic integration affects the duration of trade by affecting sunk costs.

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