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Per Capita Income Demand for Variety, and International Trade: Linder Reconsidered

  • P Ramezzana
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    We analyse a monopolistically competitive model of international trade where goods must be consumed in indivisible amounts. The number of varieties that enter a consumer's optimal consumption bundle is increasing in the consumer's per capita income. We first show that, for a given level of GDP, less populous and richer economies have a larger equilibrium number of product varieties. We then show that in an integrated world, even when total GDP is kept constant in all markets, as the levels of and the similarity in the trading partners' per capita incomes increase, so do the number of varieties exchanged and the volume of bilateral trade flows, as conjectured in the Linder hypothesis. Implications for the distribution of gains from trade between and within countries are also discussed.

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    File URL: http://cep.lse.ac.uk/pubs/download/DP0460.pdf
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    Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0460.

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    Date of creation: Jun 2000
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    Handle: RePEc:cep:cepdps:dp0460
    Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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    1. Dow, James & da Costa Werlang, Sergio Ribeiro, 1992. "Homothetic preferences," Journal of Mathematical Economics, Elsevier, vol. 21(4), pages 389-394.
    2. Davis, D.R. & Weinstein, D.E., 1999. "An Account of Global Factor Trade," Working Papers 435, Research Seminar in International Economics, University of Michigan.
    3. Davis, Donald R, 1997. "Critical Evidence on Comparative Advantage? North-North Trade in a Multilateral World," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1051-60, October.
    4. Hunter, Linda, 1991. "The contribution of nonhomothetic preferences to trade," Journal of International Economics, Elsevier, vol. 30(3-4), pages 345-358, May.
    5. Helpman, Elhanan, 1987. "Imperfect competition and international trade: Evidence from fourteen industrial countries," Journal of the Japanese and International Economies, Elsevier, vol. 1(1), pages 62-81, March.
    6. Helpman, Elhanan, 1981. "International trade in the presence of product differentiation, economies of scale and monopolistic competition : A Chamberlin-Heckscher-Ohlin approach," Journal of International Economics, Elsevier, vol. 11(3), pages 305-340, August.
    7. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
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