Why are goods and services more expensive in rich countries? demand complementarities and cross-country price differences
AbstractEmpirical studies show that tradable consumption goods are more expensive in rich countries. This paper proposes a simple yet novel explanation for this apparent failure of the law of one price: Consumers’ utility from tradable goods depends on their consumption of complementary goods and services. Monopolistically competitive firms charge higher prices in countries with more complementary goods and services because consumer demand is less elastic there. The paper embeds this explanation within a static Krugman (1980)-style model of international trade featuring differentiated tradable goods. Extended versions of the model can also account for the high prices of nontradable services in rich countries. The paper provides direct evidence in support of this new explanation. Using free-alongside-ship prices of U.S. and Chinese exports, I demonstrate that prices of specific subsets of tradable goods are higher in countries with high consumption of relevant complementary goods, conditional on per capita income and other country-level determinants of consumer goods prices.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 156.
Date of creation: 2013
Date of revision:
Other versions of this item:
- Murphy, Daniel, 2013. "Why are Goods and Services more Expensive in Rich Countries? Demand Complementarities and Cross-Country Price Differences," Working Papers 636, Research Seminar in International Economics, University of Michigan.
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F14 - International Economics - - Trade - - - Empirical Studies of Trade
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Why is living in poor countries so cheap?
by Economic Logician in Economic Logic on 2013-06-19 15:14:00
- Daniel P. Murphy, 2013. "A shopkeeper economy," Globalization and Monetary Policy Institute Working Paper 158, Federal Reserve Bank of Dallas.
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