Import Prices, Income and Inequality
AbstractWe compare three theoretical explanations for the positive empirical relationship between importer income per capita and traded goods prices. A first explanation is that consumers with higher incomes demand higher quality goods with higher prices. A second explanation is that wealthier people exhibit an increased willingness to pay for necessary goods as more goods enter the consumption set in a hierarchic demand system, and can thus be charged higher markups. A third explanation is that consumers with higher incomes are more finicky regarding their preferred variety in an ideal variety framework and can thus be charged higher markups. We discriminate between these three theories by focusing on the effect of income inequality on trade prices. Based on a large dataset with bilateral HS6 level data on 1260 final goods categories from more than 100 countries between 2000 and 2004, we find a highly significant negative effect of income inequality on unit values. This contradicts both the demand for quality and finickyness theories, while providing support for the increased willingness to pay theory linked to hierarchic demand. These findings on income inequality do not falsify the quality expansion model and the ideal variety model per se. However, the results do argue for place of importance of hierarchic demand.
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Bibliographic InfoPaper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2012-03.
Length: 45 pages
Date of creation: Feb 2012
Date of revision:
Unit Values; Importer Characteristics; Quality Expansion; Hierarchic Demand; Ideal Variety;
Other versions of this item:
- Eddy Bekkers & Joseph Francois & Miriam Manchin, 2012. "Import Prices, Income, and Inequality," IIDE Discussion Papers 20120201, Institue for International and Development Economics.
- Eddy Bekkers & Joseph F. Francois & M. Manchin, 2012. "Import Prices, Income, and Inequality," wiiw Working Papers 82, The Vienna Institute for International Economic Studies, wiiw.
- Bekkers, Eddy & Francois, Joseph & Manchin, Miriam, 2012. "Import Prices, Income, and Inequality," CEPR Discussion Papers 8911, C.E.P.R. Discussion Papers.
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
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- Hélène LATZER & Florian MAYNERIS, 2012.
"Income distribution and vertical comparative advantage Theory and evidence,"
Discussion Papers (IRES - Institut de Recherches Economiques et Sociales)
2012018, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 20 Oct 2012.
- LATZER, Hélène & MAYNERIS, Florian, 2012. "Income distribution and vertical comparative advantage. Theory and evidence," CORE Discussion Papers 2012034, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Hélène Latzer & Florian Mayneris, 2011. "Trade in quality and income distribution: an analysis of the enlarged EU market," Working Papers of BETA 2011-21, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
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