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Product Quality, Linder, and the Direction of Trade

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  • Juan Carlos Hallak

Abstract

A substantial amount of theoretical work predicts that quality plays an important role as a determinant of the global patterns of bilateral trade. This paper develops an empirical framework to estimate the empirical relevance of this prediction. In particular, it identifies the effect of quality operating on the demand side through the relationship between per capita income and aggregate demand for quality. The model yields predictions for bilateral flows at the sectoral level, and is estimated using cross-sectional data for bilateral trade among 60 countries in 1995. The empirical results confirm the theoretical prediction: rich countries tend to import relatively more from countries that produce high quality goods. The paper also shows that a severe aggregation bias explains the failure of the literature so far to find consistent empirical support for the "Linder hypothesis", the conjectured corollary to the first theory relating product quality and the direction of trade.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10877.

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Date of creation: Nov 2004
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Publication status: published as Hallak, Juan Carlos. "Product Quality And The Direction Of Trade," Journal of International Economics, 2006, v68(1,Jan), 238-265.
Handle: RePEc:nbr:nberwo:10877

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  1. Kevin M. Murphy & Andrei Shleifer, 1991. "Quality and Trade," NBER Working Papers 3622, National Bureau of Economic Research, Inc.
  2. John Romalis, 2004. "Factor Proportions and the Structure of Commodity Trade," American Economic Review, American Economic Association, vol. 94(1), pages 67-97, March.
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  6. Deardorff, Alan V., 1984. "Testing trade theories and predicting trade flows," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 10, pages 467-517 Elsevier.
  7. Markusen, James R, 1986. "Explaining the Volume of Trade: An Eclectic Approach," American Economic Review, American Economic Association, vol. 76(5), pages 1002-11, December.
  8. Cogan, John F, 1981. "Fixed Costs and Labor Supply," Econometrica, Econometric Society, vol. 49(4), pages 945-63, June.
  9. Dow, James & Werlang, Sérgio Ribeiro da Costa, 1991. "Homothetic preferences," Economics Working Papers (Ensaios Economicos da EPGE) 176, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  10. Muhammed Dalgin & Vitor Trindade & Devashish Mitra, 2008. "Inequality, Nonhomothetic Preferences, and Trade: A Gravity Approach," Southern Economic Journal, Southern Economic Association, vol. 74(3), pages 747-774, January.
  11. Peter K. Schott, 2003. "One Size Fits All? Heckscher-Ohlin Specialization in Global Production," American Economic Review, American Economic Association, vol. 93(3), pages 686-708, June.
  12. Deardorff, A.V., 1995. "Determinants of Bilateral Trade : Does Gravity Work in a Neoclassical World?," Papers 95-05, Michigan - Center for Research on Economic & Social Theory.
  13. Juan Carlos Hallak, 2003. "The Effect of Cross-Country Differences in Product Quality on the Direction of International Trade 2002," Working Papers 493, Research Seminar in International Economics, University of Michigan.
  14. David Hummels & Alexandre Skiba, 2002. "Shipping the Good Apples Out? An Empirical Confirmation of the Alchian-Allen Conjecture," NBER Working Papers 9023, National Bureau of Economic Research, Inc.
  15. Bergstrand, Jeffrey H, 1989. "The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 143-53, February.
  16. Hunter, Linda, 1991. "The contribution of nonhomothetic preferences to trade," Journal of International Economics, Elsevier, vol. 30(3-4), pages 345-358, May.
  17. Kiminori Matsuyama, 2000. "A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1093-1120, December.
  18. Francois, Joseph F & Kaplan, Seth, 1996. "Aggregate Demand Shifts, Income Distribution, and the Linder Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 244-50, May.
  19. Michael McPherson & Michael Redfearn & Margie Tieslau, 2001. "International trade and developing countries: an empirical investigation of the Linder hypothesis," Applied Economics, Taylor & Francis Journals, vol. 33(5), pages 649-657.
  20. David Hummels & Peter J. Klenow, 2005. "The Variety and Quality of a Nation's Exports," American Economic Review, American Economic Association, vol. 95(3), pages 704-723, June.
  21. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
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Cited by:
  1. Miria Pigato, 2009. "Strengthening China's and India's Trade and Investment Ties to the Middle East and North Africa," World Bank Publications, The World Bank, number 2626, October.
  2. Albert Park & Dean Yang & Xinzheng Shi & Yuan Jiang, 2006. "Exporting and Firm Performance: Chinese Exporters and the Asian Financial Crisis," Working Papers 549, Research Seminar in International Economics, University of Michigan.
  3. David Hummels & Volodymyr Lugovskyy, 2005. "Trade in Ideal Varieties: Theory and Evidence," NBER Working Papers 11828, National Bureau of Economic Research, Inc.
  4. James Harrigan, 2009. "Comment on "Importers, Exporters and Multinationals: A Portrait of Firms in the U.S. that Trade Goods"," NBER Chapters, in: Producer Dynamics: New Evidence from Micro Data, pages 552-555 National Bureau of Economic Research, Inc.
  5. James Harrigan, 2005. "Airplanes and Comparative Advantage," NBER Working Papers 11688, National Bureau of Economic Research, Inc.

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