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Vertical Product Differentiation and the Import Demand Function: Theory and Evidence

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  • Jim Malley
  • Thomas Moutos

Abstract

In this paper we use a model of vertical product differentiation to cast doubt on the general validity of the import demand function as specified in macroeconomic models. The empirical importance of our theoretical concerns is then examined with the aid of two hypotheses. According to the first hypothesis, an increase in domestic wages is expected to reduce the share in total imports for goods in which the domestic comparative advantage is in high quality varieties of these goods. The second hypothesis states that an increase in non-wage income will increase the share of a good?s imports if the country has comparative advantage in high quality varieties of this good. We find considerable empirical support for both hypotheses in the data for Germany, Japan and the United States.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 387.

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Date of creation: 2000
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Handle: RePEc:ces:ceswps:_387

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  1. Obstfeld, Maurice, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, MIT Press, vol. 97(2), pages 251-70, May.
  2. Rose, Andrew K., 1991. "The role of exchange rates in a popular model of international trade : Does the 'Marshall-Lerner' condition hold?," Journal of International Economics, Elsevier, vol. 30(3-4), pages 301-316, May.
  3. Greenaway, David & Hine, Robert C & Milner, Chris, 1995. "Vertical and Horizontal Intra-industry Trade: A Cross Industry Analysis for the United Kingdom," Economic Journal, Royal Economic Society, vol. 105(433), pages 1505-18, November.
  4. Rudiger Dornbusch, 1987. "Exchange Rates and Prices," NBER Working Papers 1769, National Bureau of Economic Research, Inc.
  5. Krugman, P., 1993. "What Do We Need to Know About the International Monetary System?," Princeton Studies in International Economics 190, International Economics Section, Departement of Economics Princeton University,.
  6. Dixon, Huw David & Rankin, Neil, 1992. "Imperfect Competition and Macroeconomics: A Survey," CEPR Discussion Papers 636, C.E.P.R. Discussion Papers.
  7. Falvey, Rodney E., 1981. "Commercial policy and intra-industry trade," Journal of International Economics, Elsevier, vol. 11(4), pages 495-511, November.
  8. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Flam, Harry & Helpman, Elhanan, 1987. "Vertical Product Differentiation and North-South Trade," American Economic Review, American Economic Association, vol. 77(5), pages 810-22, December.
  10. R. Dornbusch & S. Fischer & P. A. Samuelson, 1976. "Comparative Advantage, Trade and Payments in a Ricardian Model With a Continuum of Goods," Working papers 178, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Brander, James A., 1995. "Strategic trade policy," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 27, pages 1395-1455 Elsevier.
  12. Benavie, Arthur, 1973. "Imports in Macroeconomic Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 530-32, June.
  13. Rose, Andrew K. & Yellen, Janet L., 1989. "Is there a J-curve?," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 53-68, July.
  14. Bhargava, Alok, 1986. "On the Theory of Testing for Unit Roots in Observed Time Series," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 369-84, July.
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Cited by:
  1. Jim Malley & Thomas Moutos, 2004. "Do excessive wage increases raise imports? Theory and evidence," Macroeconomics 0401003, EconWPA.
  2. Eugenia Fotoniata & Thomas Moutos, 2011. "Product Quality, Informality, and Child Labour," CESifo Working Paper Series 3537, CESifo Group Munich.
  3. Antonis Adam & Margarita Katsimi & Thomas Moutos, 2008. "Inequality and the Import Demand Function," CESifo Working Paper Series 2196, CESifo Group Munich.
  4. Margarita Katsimi & Thomas Moutos, 2005. "Inequality and Relative Reliance on Tariffs: Theory and Evidence," CESifo Working Paper Series 1457, CESifo Group Munich.
  5. Antonis Adam & Thomas Moutos, 2002. "The Political Economy of EU Enlargement: Or, Why Japan is not a Candidate Country?," CESifo Working Paper Series 704, CESifo Group Munich.

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