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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. Rose, Andrew K. & Yellen, Janet L., 1989. "Is there a J-curve?," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 53-68, July.
  2. 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.
  3. Falvey, Rodney E., 1981. "Commercial policy and intra-industry trade," Journal of International Economics, Elsevier, vol. 11(4), pages 495-511, November.
  4. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
  5. Dixon, H. & Rankin, N., 1991. "Imperfect Competition and Macroeconomics: a Survey," The Warwick Economics Research Paper Series (TWERPS) 387, University of Warwick, Department of Economics.
  6. 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.
  7. James A. Brander, 1995. "Strategic Trade Policy," NBER Working Papers 5020, National Bureau of Economic Research, Inc.
  8. 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,.
  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. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1977. "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, American Economic Association, vol. 67(5), pages 823-39, December.
  11. 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.
  12. 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.
  13. Dixon, H.D., 1992. "Imperfect Competition and Open Economy Macroeconomics," Economics Working Papers 1993-1, School of Economics and Management, University of Aarhus.
  14. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
  15. 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. Malley, Jim & Moutos, Thomas, 2006. "Do excessive wage increases raise imports?: Theory and evidence," Japan and the World Economy, Elsevier, vol. 18(2), pages 194-220, March.
  2. Antonis Adam & Margarita Katsimi & Thomas Moutos, 2012. "Inequality and the import demand function," Oxford Economic Papers, Oxford University Press, vol. 64(4), pages 675-701, October.
  3. Margarita Katsimi & Thomas Moutos, 2005. "Inequality and Relative Reliance on Tariffs: Theory and Evidence," CESifo Working Paper Series 1457, CESifo Group Munich.
  4. Eugenia Fotoniata & Thomas Moutos, 2011. "Product Quality, Informality, and Child Labour," CESifo Working Paper Series 3537, 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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