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Trade of quality differentiated goods and import elasticities

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Abstract

This paper studies imports of quality products. The issue is more and more relevant because of the strong evidence of such differentiation in international trade. We first derive individual demand, then we aggregate without using the representative consumer hypothesis. We find that quality reduces reaction of imports to prices without affecting reaction to income. At the national level, it emerges that imports of richer country are less reactive to prices. Such countries can easily switch to high quality-high price productions without trade balance and competitive problems. The opposite seems true for poorer countries. Finally, quality causes parameter non-constancies in estimation and overlooking this determinant of imports causes underestimates of elasticities in absolute value.

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Bibliographic Info

Paper provided by KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy in its series KITeS Working Papers with number 112.

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Length: 14 pages
Date of creation: Jul 2000
Date of revision: Jul 2000
Handle: RePEc:cri:cespri:wp112

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Keywords: Import demand; Quality differentiation; Price and income elasticity.;

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  1. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  2. George C. Davis, 1995. "Product Differentiation and Representative Agent Import Demand Systems: A Reconsideration and Reconciliation," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 43(1), pages 149-164, 03.
  3. David Greenaway & Robert Hine & Chris Milner, 1994. "Country-specific factors and the pattern of horizontal and vertical intra-industry trade in the UK," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(1), pages 77-100, March.
  4. Lancaster, Kelvin, 1980. "Intra-industry trade under perfect monopolistic competition," Journal of International Economics, Elsevier, vol. 10(2), pages 151-175, May.
  5. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier.
  6. Krugman, Paul R, 1981. "Intraindustry Specialization and the Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 959-73, October.
  7. Aturupane, Chonira & Djankov, Simeon & Hoekman, Bernard, 1997. "Determinants of intra-industry trade between East and West Europe," Policy Research Working Paper Series 1850, The World Bank.
  8. Dipendra Sinha, 1997. "Determinants of Import Demand in Thailand," International Economic Journal, Taylor & Francis Journals, vol. 11(4), pages 73-873.
  9. Xiaoling Hu & Yue Ma, 1999. "International intra-industry trade of China," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 135(1), pages 82-101, March.
  10. Khan, Mohsm S. & Ross, Knud Z., 1977. "The functional form of the aggregate import demand equation," Journal of International Economics, Elsevier, vol. 7(2), pages 149-160, May.
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Cited by:
  1. Pavel Kadochnikov, 2006. "An Analysis of Import Substitution in Russia after the 1998 Crisis," Research Paper Series, Gaidar Institute for Economic Policy, issue 95, pages 148.
  2. Borin, Alessandro & Lamieri, Marco, 2007. "Estimating Product Quality in International Trade," MPRA Paper 14678, University Library of Munich, Germany.

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