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Bounded Love of Variety and Patterns of Trade

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  • Philip Sauré

Abstract

Recent trade data exhibit the following four empirical regularities: (i) countries import only a small fraction of all traded varieties (ii) per capita income and the number of imported varieties correlate positively (iii) per capita income and trade shares correlate positively and, finally, (iv) world trade shares have increased substantially. The present paper argues that standard theories fail to explain at least some of these patterns and subsequently shows that a small and reasonable change in the demand structure can reconcile the New Trade model with the data. Its key assumption imposes an upper bound on consumers' marginal utility from varieties. This implies that consumers purchase only the cheaper share of varieties, while expensive foreign varieties bearing high transport costs are not consumed. Technological progress that increases per capita consumption of those varieties in the consumption basket decreases marginal utility derived from them and induces consumers to extend their consumption to more expensive varieties produced at distant locations. Through this additional margin trade shares increase as productivity grows. Productivity growth is thus identified as a joint determinant of trade shares, the number imported varieties, and per capita income.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2009-10.

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Length: 36 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:snb:snbwpa:2009-10

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Keywords: Marginal Utility; Variety;

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References

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Citations

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Cited by:
  1. Goksel, Turkmen, 2012. "Financial constraints and international trade patterns," Economic Modelling, Elsevier, vol. 29(6), pages 2222-2225.
  2. Andreas Kropf & Philip Ulrich Sauré, 2012. "Fixed Costs per Shipment," Working Papers 2012-13, Swiss National Bank.
  3. Maria MASOOD, 2014. "New Evidence on Development and Cultural Trade: Diversification, Reconcentration and Domination," Working Papers P85, FERDI.
  4. Tarasov, Alexander, 2010. "Consumer Preferences in Monopolistic Competition Models," Discussion Papers in Economics 11489, University of Munich, Department of Economics.
  5. Alexander Tarasov, 2014. "Preferences and income effects in monopolistic competition models," Social Choice and Welfare, Springer, vol. 42(3), pages 647-669, March.
  6. Bekkers, Eddy & Francois, Joseph & Manchin, Miriam, 2012. "Import Prices, Income, and Inequality," CEPR Discussion Papers 8911, C.E.P.R. Discussion Papers.

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