Income Differences and Prices of Tradables
AbstractEmpirical studies ﬁnd a strong positive relationship between a country’s per-capita income and price level of final tradable goods. Among alternative explanations of this observation, I focus on variable mark-ups by ﬁrms. Mark-ups that vary with destinations’ incomes are evident from a clothing manufacturer’s online catalogue featuring unit prices of identical goods sold in 24 countries. Such price discrimination on the basis of income suggests that ﬁrms exploit lower price elasticity of demand for identical goods in richer countries. In order to capture that, I introduce non-homothetic preferences in a model of trade with product differentiation and heterogeneity in firm productivity. The model helps bring theory and data closer along a key dimension: it generates positively related prices and incomes, while preserving desirable features of firm behavior and trade flows of existing frameworks. Quantitatively, the model suggests that variable mark-ups can account for as much as a third of the observed positive relationship between prices of tradables and income across a large sample of countries.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 692.
Date of creation: 2009
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Other versions of this item:
- Ina Simonovska, 2011. "Income Differences and Prices of Tradables," Working Papers 1015, University of California, Davis, Department of Economics.
- Ina Simonovska, 2010. "Income differences and prices of tradables," Globalization and Monetary Policy Institute Working Paper 55, Federal Reserve Bank of Dallas.
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F14 - International Economics - - Trade - - - Empirical Studies of Trade
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