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Income Differences and Prices of Tradables

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  • Ina Simonovska

    (Department of Economics, University of California Davis)

Abstract

I study the positive relationship between prices of tradable goods and per-capita income. I develop a highly tractable general equilibrium model of international trade with heterogeneous firms and non-homothetic consumer preferences that accounts for the observed cross-country variation in prices along two key dimensions. The model yields a new testable prediction that relates prices to measurable variables. I use the prediction to estimate the elasticity of price with respect to per-capita income from unique data featuring prices of 245 identical goods sold exclusively via the Internet in twenty-nine European, Asian, and North American markets. The empirical findings suggest that variable mark-ups account for a third of the observed cross-country differences in prices of tradables.

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Bibliographic Info

Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 1015.

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Length: 48
Date of creation: 11 Nov 2011
Date of revision:
Handle: RePEc:cda:wpaper:10-15

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Keywords: PPP failure; variable mark-ups; heterogeneous firms; non-homothetic preferences;

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References

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  1. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 295-316.
  2. George Alessandria & Joseph P. Kaboski, 2011. "Pricing-to-Market and the Failure of Absolute PPP," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 91-127, January.
  3. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  4. Mario J. Crucini & Mototsugu Shintani, 2002. "Persistence in Law-Of-One-Price Deviations: Evidence from Micro-Data," Vanderbilt University Department of Economics Working Papers 0222, Vanderbilt University Department of Economics, revised Jul 2004.
  5. Michael E. Waugh, 2009. "International trade and income differences," Staff Report 435, Federal Reserve Bank of Minneapolis.
  6. Costas Arkolakis & Svetlana Demidova & Peter J. Klenow & Andrés Rodríguez-Clare, 2008. "Endogenous Variety and the Gains from Trade," NBER Working Papers 13933, National Bureau of Economic Research, Inc.
  7. Costas Arkolakis, 2008. "Market Penetration Costs and Trade Dynamics," 2008 Meeting Papers 548, Society for Economic Dynamics.
  8. 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.
  9. Robert C. Feenstra & Robert E. Lipsey & Haiyan Deng & Alyson C. Ma & Hengyong Mo, 2005. "World Trade Flows: 1962-2000," NBER Working Papers 11040, National Bureau of Economic Research, Inc.
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