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Inequality, Nonhomothetic Preferences, and Trade: A Gravity Approach

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  • Muhammed Dalgin
  • Devashish Mitra
  • Vitor Trindade

Abstract

In this paper, we show that inequality is an important determinant of import demand, in that it augments the standard gravity model in a significant way. We interpret this result with the aid of a model in which tastes are nonhomothetic. Classification of products, based on the correlation between household budget shares in the US and income, into "luxuries" and "necessities," works very well in our analysis when we restrict the analysis to developed importing countries. While the imports of luxuries increase with the importing country's inequality, imports of necessities decrease with it. Furthermore, we find that an increase in the level of inequality in the importing country generally leads to an increase in imports from developed countries, and to a reduction in imports from low-income countries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10800.

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Date of creation: Sep 2004
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Handle: RePEc:nbr:nberwo:10800

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  1. Stephen Redding & Anthony J. Venables, 2001. "Economic Geography and International Inequality," International Trade 0103003, EconWPA.
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  17. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May.
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