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Quality Ladders In A Ricardian Model Of Trade With Nonhomothetic Preferences

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  • Esteban Jaimovich
  • Vincenzo Merella

Abstract

The literature on North-South trade has explored conditions under which international trade might magnify income disparities between the advanced North and the backward South. Little attention has yet been placed on the effect of trade on countries that do not display substantial dissimilarities concerning aggregate capital endowments. We show that even when no single country is technologically more advanced than any other one and productivity changes are uniform and identical in all countries, international trade may still be a source of income divergence when nonhomothetic preferences and quality ladders are jointly taken into account. Income divergence will be experienced when comparative advantages induce patterns of specialisation that, although optimal for each country at some initial point in time, do not offer the same scope for improvements in terms of subsequent quality upgrading of final products.
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  • Esteban Jaimovich & Vincenzo Merella, 2012. "Quality Ladders In A Ricardian Model Of Trade With Nonhomothetic Preferences," Journal of the European Economic Association, European Economic Association, vol. 10(4), pages 908-937, August.
  • Handle: RePEc:bla:jeurec:v:10:y:2012:i:4:p:908-937 DOI: j.1542-4774.2012.01077.x
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    6. Benedetti Fasil, Cristiana & Borota, Teodora, 2013. "World trade patterns and prices: The role of productivity and quality heterogeneity," Journal of International Economics, Elsevier, vol. 91(1), pages 68-81.
    7. Pablo Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2011. "Income Distribution, Product Quality, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 721-765.
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    Cited by:

    1. Yilmazkuday, Hakan, 2016. "Constant versus variable markups: Implications for the law of one price," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 154-168.
    2. Jaimovich, Esteban & Merella, Vincenzo, 2015. "Love for quality, comparative advantage, and trade," Journal of International Economics, Elsevier, vol. 97(2), pages 376-391.
    3. Pierre M. Picard & Alessandro Tampieri, 2016. "Income Effects and Vertical Differentiation in International Trade," CREA Discussion Paper Series 16-05, Center for Research in Economic Analysis, University of Luxembourg.
    4. Benedetti Fasil, Cristiana & Borota, Teodora, 2013. "World trade patterns and prices: The role of productivity and quality heterogeneity," Journal of International Economics, Elsevier, vol. 91(1), pages 68-81.
    5. Vincenzo Merella, 2014. "Do Quality Ladders Rationalise the Observed Engel Curves?," BCAM Working Papers 1401, Birkbeck Centre for Applied Macroeconomics.
    6. Vincenzo Merella & Stephen E. Satchell, 2014. "Technology Shocks and Asset Pricing: The Role of Consumer Confidence," Carlo Alberto Notebooks 352, Collegio Carlo Alberto.
    7. Ciani, Andrea, 2017. "Income inequality and the quality of imports," DICE Discussion Papers 245, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    8. Schetter, Ulrich, 2016. "Comparative Advantages with Product Complexity and Product Quality," Annual Conference 2016 (Augsburg): Demographic Change 145933, Verein für Socialpolitik / German Economic Association.

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