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Bounded Love of Variety and Patterns of Trade

  • Philip Sauré

    ()

Long-run bilateral trade data exhibit 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 (iv) world trade shares have markedly increased. Standard theories fail to simultaneously explain these patterns. This paper reconciles theory and data by assuming that the consumer’s marginal utility from varieties is bounded. Given this assumption, consumers do not purchase foreign varieties that bear high transport costs. With increasing incomes, however, consumers include more of the latter varieties, which generates the four patterns above. Copyright Springer Science+Business Media, LLC 2012

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File URL: http://hdl.handle.net/10.1007/s11079-011-9207-3
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 23 (2012)
Issue (Month): 4 (September)
Pages: 645-674

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Handle: RePEc:kap:openec:v:23:y:2012:i:4:p:645-674
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