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Love for Quality, Comparative Advantage, and Trade

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  • Esteban Jaimovich
  • Vincenzo Merella

Abstract

We propose a theory of trade in which comparative advantages reveal themselves gradually over the path of development. Following the Ricardian tradition, countries specialise and export the set of goods they are able to produce at relatively lower cost given their exogenous initial endowments. However, we introduce two new features into a Ricardian trade model with horizontally and vertically differentiated goods. First, individuals have nonhomothetic preferences in that their willingness to pay for quality rises with their income. Second, heterogeneities in productivity become more pronounced at higher levels of quality of production. As a result, our theory predicts that the scope for international trade widens and productive specialisation increases as real incomes grow and wealthier consumers raise the quality of their consumption baskets. Our predictions find empirical support in a number tests performed using bilateral trade data at the product level.

Suggested Citation

  • Esteban Jaimovich & Vincenzo Merella, 2011. "Love for Quality, Comparative Advantage, and Trade," Carlo Alberto Notebooks 216, Collegio Carlo Alberto, revised 2012.
  • Handle: RePEc:cca:wpaper:216
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    References listed on IDEAS

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    Cited by:

    1. Leonid Azarnert, 2014. "Agricultural Exports, Tariffs and Growth," Open Economies Review, Springer, vol. 25(4), pages 797-807, September.
    2. 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.
    3. Schetter, Ulrich, 2016. "Comparative Advantages with Product Complexity and Product Quality," Annual Conference 2016 (Augsburg): Demographic Change 145933, Verein für Socialpolitik / German Economic Association.
    4. Leonid V. Azarnert, 2016. "Trade, Luxury Goods and a Growth Enhancing Tariff," CESifo Working Paper Series 5943, CESifo Group Munich.
    5. Jaimovich, Esteban, 2012. "Import diversification along the growth path," Economics Letters, Elsevier, vol. 117(1), pages 306-310.
    6. Fedoseeva, Svetlana & Zeidan, Rodrigo, 2016. "A dead-end tunnel or the light at the end of it: The role of BRICs in European exports," Economic Modelling, Elsevier, vol. 59(C), pages 237-248.

    More about this item

    Keywords

    International Trade; Nonhomothetic Preferences; Quality Ladders;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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