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Love for Quality, Comparative Advantage, and Trade

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  • Esteban Jaimovich
  • Vincenzo Merella

Abstract

We propose a theory of trade in which comparative advantages reveal themselves gradually over the path of development. Following the Ricardian tradition, countries specialise and export the set of goods they are able to produce at relatively lower cost given their exogenous initial endowments. However, we introduce two new features into a Ricardian trade model with horizontally and vertically differentiated goods. First, individuals have nonhomothetic preferences in that their willingness to pay for quality rises with their income. Second, heterogeneities in productivity become more pronounced at higher levels of quality of production. As a result, our theory predicts that the scope for international trade widens and productive specialisation increases as real incomes grow and wealthier consumers raise the quality of their consumption baskets. Our predictions find empirical support in a number tests performed using bilateral trade data at the product level.

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Bibliographic Info

Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 216.

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Length: 47 pages
Date of creation: 2011
Date of revision: 2012
Handle: RePEc:cca:wpaper:216

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Keywords: International Trade; Nonhomothetic Preferences; Quality Ladders;

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References

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  1. Verhoogen, Eric A., 2007. "Trade, Quality Upgrading and Wage Inequality in the Mexican Manufacturing Sector," CEPR Discussion Papers 6385, C.E.P.R. Discussion Papers.
  2. Guillaume Gaulier & Soledad Zignago, 2010. "BACI: International Trade Database at the Product-Level. The 1994-2007 Version," Working Papers 2010-23, CEPII research center.
  3. Esteban Jaimovich & Vincenzo Merella, 2012. "Quality Ladders In A Ricardian Model Of Trade With Nonhomothetic Preferences," Journal of the European Economic Association, European Economic Association, vol. 10(4), pages 908-937, 08.
  4. Tarasov, Alexander, 2008. "Trade Liberalization and Welfare Inequality: a Demand-Based Approach," MPRA Paper 20199, University Library of Munich, Germany, revised Jan 2010.
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  15. Alejandro Artopoulos & Daniel Friel & Juan Carlos Hallak, 2011. "Lifting the Domestic Veil: The Challenges of Exporting Differentiated Goods Across the Development Divide," NBER Working Papers 16947, National Bureau of Economic Research, Inc.
  16. Baldwin, Richard & Harrigan, James, 2007. "Zeros, Quality and Space: Trade Theory and Trade Evidence," CEPR Discussion Papers 6368, C.E.P.R. Discussion Papers.
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  23. Ana Cecília Fieler, 2011. "Nonhomotheticity and Bilateral Trade: Evidence and a Quantitative Explanation," Econometrica, Econometric Society, vol. 79(4), pages 1069-1101, 07.
  24. Peter K. Schott, 2004. "Across-product Versus Within-product Specialization in International Trade," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 646-677, May.
  25. Jun Ishii & Kei-Mu Yi, 1997. "The growth of world trade," Research Paper 9718, Federal Reserve Bank of New York.
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Cited by:
  1. Leonid V. Azarnert, 2014. "Agricultural Exports, Tariffs and Growth," CESifo Working Paper Series 4583, CESifo Group Munich.
  2. Esteban Jaimovich, 2012. "Import Diversification along the Growth Path," Carlo Alberto Notebooks 242, Collegio Carlo Alberto.

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