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International Prices and Endogenous Quality

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  • Robert C. Feenstra
  • John Romalis

Abstract

The unit values of internationally traded goods are heavily influenced by quality. We model this in an extended monopolistic competition framework where, in addition to choosing price, firms simultaneously choose quality. We allow countries to have non-homothetic demand for quality. The optimal choice of quality by firms reflects this non-homothetic demand as well as the costs of production, including specific transport costs, under the “Washington apples” effect. We estimate the implied gravity equation using detailed bilateral trade data for about 200 countries over 1984-2008. Our system identifies quality and quality-adjusted prices, from which we will construct price indexes for imports and exports for each country that will be incorporated into the next generation of the Penn World Table.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18314.

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Date of creation: Aug 2012
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Handle: RePEc:nbr:nberwo:18314

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  1. Angus Deaton & Alan Heston, 2010. "Understanding PPPs and PPP-Based National Accounts," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 1-35, October.
  2. Eddy Bekkers & Joseph Francois & Miriam Manchin, 2012. "Import Prices, Income and Inequality," Economics working papers, Department of Economics, Johannes Kepler University Linz, Austria 2012-03, Department of Economics, Johannes Kepler University Linz, Austria.
  3. Baldwin, Richard & Ito, Tadashi, 2008. "Quality Competition Versus Price Competition Goods: An Empirical Classification," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6952, C.E.P.R. Discussion Papers.
  4. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, Econometric Society, vol. 70(5), pages 1741-1779, September.
  5. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 120(2), pages 304 - 345.
  6. Stephen Redding & Anthony J. Venables, 2001. "Economic Geography and International Inequality," CEP Discussion Papers dp0495, Centre for Economic Performance, LSE.
  7. Mary Amiti & Amit K. Khandelwal, 2013. "Import Competition and Quality Upgrading," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 476-490, May.
  8. Ina Simonovska, 2010. "Income differences and prices of tradables," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 55, Federal Reserve Bank of Dallas.
  9. Benjamin R. Mandel, 2010. "Heterogeneous firms and import quality: evidence from transaction-level prices," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 991, Board of Governors of the Federal Reserve System (U.S.).
  10. Richard Baldwin & James Harrigan, 2007. "Zeros, Quality and Space: Trade Theory and Trade Evidence," NBER Working Papers 13214, National Bureau of Economic Research, Inc.
  11. Francis Kramarz & Jonathan Eaton & Samuel Kortum, 2005. "An Anatomy of International Trade: Evidence from French Firms," 2005 Meeting Papers, Society for Economic Dynamics 197, Society for Economic Dynamics.
  12. Peter K. Schott, 2004. "Across-product Versus Within-product Specialization in International Trade," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(2), pages 646-677, May.
  13. Diewert, W Erwin, 1978. "Superlative Index Numbers and Consistency in Aggregation," Econometrica, Econometric Society, Econometric Society, vol. 46(4), pages 883-900, July.
  14. Costas Arkolakis, 2008. "Market Penetration Costs and the New Consumers Margin in International Trade," NBER Working Papers 14214, National Bureau of Economic Research, Inc.
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Cited by:
  1. Amit K. Khandelwal & Peter K. Schott & Shang-Jin Wei, 2013. "Trade Liberalization and Embedded Institutional Reform: Evidence from Chinese Exporters," American Economic Review, American Economic Association, American Economic Association, vol. 103(6), pages 2169-95, October.
  2. Benjamin R. Mandel, 2013. "Chinese exports and U.S. import prices," Staff Reports, Federal Reserve Bank of New York 591, Federal Reserve Bank of New York.
  3. Jennie Bai & Jia Guo & Benjamin Mandel, 2013. "Going global: markups and product quality in the Chinese art market," Staff Reports, Federal Reserve Bank of New York 614, Federal Reserve Bank of New York.
  4. Gabor Bekes & Balazs Murakozy & Zsuzsa Munkacsi & Gabor Oblath, 2013. "Unit Values, Unit Labor Costs and Trade Performance in Four Central European Countries," IEHAS Discussion Papers, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences 1329, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  5. Christian Henn & Chris Papageorgiou & Nicola Spatafora, 2013. "Export Quality in Developing Countries," IMF Working Papers 13/108, International Monetary Fund.
  6. Di Comite, Francesco & Thisse, Jacques-François & Vandenbussche, Hylke, 2014. "Verti-zontal differentiation in export markets," Journal of International Economics, Elsevier, Elsevier, vol. 93(1), pages 50-66.
  7. Francesco Di Comite, 2012. "Measuring quality and non-cost competitiveness at a country-product level," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 467, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

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