TY  - JOUR
AU  - Crucini,Mario J.
AU  - Yilmazkuday,Hakan
TI  - A Model of International Cities: Implications for Real Exchange Rates
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14834
PY  - 2009
Y2  - April 2009
UR  - http://www.nber.org/papers/w14834
L1  - http://www.nber.org/papers/w14834.pdf
N1  - Author contact info:
Mario J. Crucini
Department of Economics
Vanderbilt University
Box 1819 Station B
Nashville, TN 37235-1819
Tel: 615/322-7357
Fax: 615/343-8459
E-Mail: mario.j.crucini@vanderbilt.edu

Hakan Yilmazkuday
Department of Economics
Florida International University
Miami, FL 33199
E-Mail: skuday@gmail.com
AB  - We develop a model of cities each inhabited by two agents, one specializing in manufacturing, the other in distribution. The distribution sector represents the physical transformation of all internationally traded goods from the factory gate to the final consumer. Using a panel of micro-prices at the city level, we decompose the long-run variance of LOP deviations into the fraction due to distribution costs, trade costs and a residual. For the median good, trade costs account for 50 percent of the variance, distribution costs account for 10 percent with 40 percent of the variance unexplained. Since the sample of items in the data are heavily skewed toward traded goods, we also decompose the variance based on the median good on an expenditure-weighted basis. Now the tables turn, with distribution costs accounting for 43 percent, trade costs 36 percent and 21 percent of the variance unexplained.
ER  -