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Per-capita incomes and the extensive margin of bilateral trade

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  • Christian Hepenstrick

Abstract

This paper argues that the per-capita income of importers is an important determinant of the extensive margin of trade. I formalize this by incorporating preferences that allow for binding nonnegativity constraints into an otherwise standard Ricardian model. This implies that agents adjust the set of goods from which they consume with income, which in turn affects the extensive margin of bilateral trade. I quantify the model using data on US consumer behavior and aggregate values of bilateral trade flows. I find that the behavior of the model’s extensive margin of bilateral trade is consistent with elasticities measured in the data. Two counterfactual experiments demonstrate the quantitative importance of the mechanism outlined in this paper.

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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 519.

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Date of creation: Nov 2010
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Handle: RePEc:zur:iewwpx:519

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Cited by:
  1. Behrens, Kristian & Murata, Yasusada, 2009. "Globalization and Individual Gains from Trade," CEPR Discussion Papers 7448, C.E.P.R. Discussion Papers.
  2. Hepenstrick, Christian & Tarasov, Alexander, 2013. "Trade Openness and Cross-country Income Differences," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 402, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Claudia Bernasconi, 2013. "Similarity of income distributions and the extensive and intensive margin of bilateral trade flows," ECON - Working Papers 115, Department of Economics - University of Zurich.
  4. Kristian Behrens & Yasusada Murata, 2012. "Globalization and Individual Gains from Trade (revised version)," Cahiers de recherche 1218, CIRPEE.
  5. repec:lmu:muenec:15421 is not listed on IDEAS

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