Reduced trade costs boost global prosperity, but increase economic volatility
Trade costs affect how much countries trade with each other and how connected their markets are. Lower trade costs mean more integration between markets, leading to changes in prices and consumption patterns. As trade costs decrease, the variability of exchange rates decreases, while the variability of trade balances increases. The impact on other macroeconomic variables like income and consumption is less clear. Empirical evidence partially supports these predictions.