Trade of quality differentiated goods and import elasticities
This paper studies imports of quality products. The issue is more and more relevant because of the strong evidence of such differentiation in international trade. We first derive individual demand, then we aggregate without using the representative consumer hypothesis. We find that quality reduces reaction of imports to prices without affecting reaction to income. At the national level, it emerges that imports of richer country are less reactive to prices. Such countries can easily switch to high quality-high price productions without trade balance and competitive problems. The opposite seems true for poorer countries. Finally, quality causes parameter non-constancies in estimation and overlooking this determinant of imports causes underestimates of elasticities in absolute value.
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