Question

can you speculate on how reduced transportation costs would affect our models of trade?

Think specifically about the Specific Factors Model.

Answer 1

Specific factor model:

The specific factor model is designed to demonstrate the effects of trade in an economy in which one factor of production is specific to an industry. The most interesting results pertain to the changes in the distribution of income that would arise as a country moves to free trade.

The specific factor model assumes that an economy produces two goods using two factors of production, capital and labor, in a perfectly competitive market. One of the two factors of production, typically capital, is assumed to be specific to a particular industry. That is, it is completely immobile. The second factor, labor, is assumed to be freely and costlessly mobile between the two industries. Because capital is immobile, one could assume that the capital in the two industries are different, or differentiated, and thus are not substitutable in production. Under this interpretation, it makes sense to imagine that there are really three factors of production: labor, specific capital in industry one, and specific capital in industry two.

Reduced costs of transportation will reduce the cost of production as there are many raw materials transported to the industries for production. It will reduce the cost for traders too. In the context of international trade It will appriciate free trade by removing the barrier of heavy transportation cost between the countries.