|Hepenstrick, Christian and Tarasov, Alexander (November 2012): Per capita income and the extensive margin of bilateral trade. Discussion Papers in Economics 2012-29|
This paper quantitatively explores the role of the demand structure in explaining the relationship between an importer's per capita income and the extensive margin of bilateral trade. The underlying mechanism is based on the fact that agents expand the set of goods they consume with income. This in turn affects the structure of a country's import demand and therewith the extensive margin of trade. We formalize this intuition by incorporating preferences that allow for binding non-negativity constraints into an otherwise standard Ricardian multi-country model. We quantify the model using the data on US consumer expenditures and aggregate values of bilateral trade flows and find that the behavior of the model's extensive margin of bilateral trade is consistent with the data (as opposed to the standard model). Two popular counterfactual experiments - lower trade costs and the rise of China and India - demonstrate that the mechanism outlined in this paper is indeed quantitatively important.
|Item Type:||Paper (Discussion Paper)|
|Keywords:||Non-homothetic preferences, extensive margin, Ricardian trade|
Economics > Munich Discussion Papers in Economics
|Subjects:||300 Social sciences > 300 Social sciences, sociology and anthropology|
300 Social sciences > 330 Economics
|JEL Classification:||F10, F11, F19|
|Deposited On:||16. Nov 2012 15:28|
|Last Modified:||15. Feb 2015 23:54|
Alvarez, F., and R. Lucas (2007): General equilibrium analysis of the Eaton-Kortum model of international trade, Journal of Monetary Economics, 54(6), 1726-1768.
Anderson, J., and E. Van Wincoop (2004): Trade costs, Journal of Economic Literature, 42(3), 691-751.
Baldwin, R., and J. Harrigan (2011): Zeros, quality and space: trade theory and trade evidence, American Economic Journal: Microeconomics, 3(2), 60-88.
BLS (2003): 2003 consumer expenditure interview survey, public use microdata, documentation, U.S. Department of Labor, Bureau of Labor Statistics, Division of Consumer Expenditure Surveys.
Broda, C., and D. Weinstein (2006): Globalization and the gains from variety, Quarterly Journal of Economics, 121(2), 541-585.
Chaney, T. (2008): Distorted gravity: the intensive and extensive margins of international trade, American Economic Review, 98(4), 1707-1721.
Choi, Y., D. Hummels, and C. Xiang (2009): Explaining import quality: the role of the income distribution, Journal of International Economics, 78(2), 293-303.
Costinot, A., and I. Komunjer (2007): What goods do countries trade? New Ricardian predictions, NBER Working Paper No. 13691.
Dollar, D., and A. Kraay (2002): Growth is good for the poor, Journal of economic growth, 7(3), 195-225.
Eaton, J., and S. Kortum (2002): Technology, geography, and trade, Econometrica, 70(5), 1741-1779.
Eaton, J., and S. Kortum (2005): Technology in the global economy: A framework for quantitiative analysis, Book manuscript, New York University and University of Chicago.
Eaton, J., S. Kortum, and F. Kramarz (2004): Dissecting trade: Firms, industries, and export destinations, American Economic Review, 94(2), 150-154.
Fajgelbaum, P., G. Grossman, and E. Helpman (2011): Income distribution, product quality, and international trade, Journal of Political Economy, 119(4), 721-765.
Falkinger, J., and J. Zweimüller (1996): The cross-country Engel curve for product diversification, Structural Change and Economic Dynamics, 7(1), 79-97.
Feenstra, R. (1994): New product varieties and the measurement of international prices, American Economic Review, 84(1), 157-177.
Fieler, A. C. (2011): Non-homotheticity and bilateral trade: evidence and a quantitative explanation, Econometrica, 79(4), 1069-1101.
Foellmi, R., C. Hepenstrick, and J. Zweimüller (2010): Non-homothetic preferences, parallel imports and the extensive margin of international trade, CEPR Discussion Paper No. 7939.
Gaulier, G., S. Zignago, D. Sondjo, A. Sissoko, and R. Paillacar (2010): BACI: a world database of international trade at the product-level, 1995-2007 version, Centre d'Etudes Prospectives et d'Informations Internationales Working Paper No. 2010-23.
Gronau, R., and D. Hamermesh (2008): The demand for variety: a household production perspective, Review of Economics and Statistics, 90(3), 562-572.
Hummels, D., and P. Klenow (2002): The variety and quality of a nation's trade, NBER Working Paper No. 8712.
Jackson, L. (1984): Hierarchic demand and the Engel curve for variety, Review of Eco- nomics and Statistics, pp. 8-15.
Jekanowski, M., and J. Binkley (2000): Food purchase diversity across US markets, Agribusiness, 16(4), 417-433.
Krugman, P. (1980): Scale economies, product differentiation, and the pattern of trade, American Economic Review, 70(5), 950-959.
Markusen, J. (2010): Putting per-capita income back into trade theory, NBER Working Paper No. 15903.
Mas-Colell, A., M. Whinston, and J. Green (1995): Microeconomic theory. Oxford University Press, New York.
Matsuyama, K. (2000): A Ricardian model with a continuum of goods under nonhomothetic preferences: demand complementarities, income distribution, and North-South trade, Journal of Political Economy, 108(6), 1093-1120.
Melitz, M. (2003): The impact of trade on intra-industry reallocations and aggregate industry productivity, Econometrica, 71(6), 1695-1725.
Moon, W., W. Florkowski, L. Beuchat, A. Resurreccion, P. Paraskova, J. Jordanov, and M. Chinnan (2002): Demand for food variety in an emerging market economy, Applied Economics, 34(5), 573-581.
Sauré, P. (2012): Bounded love of variety and patterns of trade, Open Economies Review, 23, 645-674.
Silva, J., and S. Tenreyro (2006): The log of gravity, Review of Economics and Statistics, 88(4), 641-658.
Simonovska, I. (2010): Income differences and prices of tradables, NBER working paper No. 16233.
Simonovska, I., and M. Waugh (2012): The elasticity of trade: Estimates and evidence, UC Davis Working Paper No. 11-2.
Tarasov, A. (2012a): Per capita income, market access costs, and trade volumes, Journal of International Economics, 86(2), 284-294.
---(2012b): Trade Liberalization and Welfare Inequality: A Demand-Based Approach, Scandinavian Journal of Economics, forthcoming.
Thiele, S., and C. Weiss (2003): Consumer demand for food diversity: evidence for Germany, Food Policy, 28(2), 99-115.
UNIDO (2003): Industrial statistics database. United Nations Industrial Development Organization.
UNU-WIDER (2008): World income inequality database, version 2.0c, World Institute for Development Economics Research of the United Nations University.
Waugh, M. (2010): International trade and income differences, American Economic Review, 100(5), 2093-2124.
World Bank (2010): World development indicators. World Bank.