Efficiency of LDC Trading Patterns: The Case of Iran

International trade theory has traditionally been cast in an idealized setting, with numerous assumptions, where the flow of goods is determined by static comparative advantage. In the Ricardo-Torrens theory, differences in technology across countries affect labor productivities, pretrade prices, and thus determine comparative advantage and trade. In the Heckscher-Ohlin theory, differences in relative factor endowments affect pretrade relative factor prices, relative costs of production, and thus determine comparative advantage and trade. Originally, such models were formulated for a two-country world, but with the addition of a third country it became clear that under certain circumstances multilateral comparisons may be appropriate (see Ronald Jones; Anne Krueger). Empirical verifications of both theories have been quite extensive. Most of the tests have been bilateral, one country to another or one country trading with the rest of the world. In general the results have been, at best, very mixed. The explanations for the unexpected results have involved such theoretical modifications as the need to introduce natural resources explicitly, to distinguish between new and standard commodities, to account for heterogeneity of factors and products, to include barriers to trade and so on. In all this work, the basic existence of competitive markets has been an accepted assumption: that is, a country will face one import price for a homogeneous product because competition will drive out inefficient exporters. However this is a testable proposition; specifically, does a country buy its imports from the low cost producer and, if not, is the overpayment significant? The a priori reasons for the existence of any such trade inefficiencies in import prices or price divergences are many. One possible explanation is that there exist variations in unit export prices for an exporter. Gary Hufbauer and J. P. O'Neill in examining unit values of U.S. machinery exports suggested several explanations for export price differences for a given exporter: