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Product Quality, Linder, and the Direction of Trade

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  • Juan Carlos Hallak

Abstract

A substantial amount of theoretical work predicts that quality plays an important role as a determinant of the global patterns of bilateral trade. This paper develops an empirical framework to estimate the empirical relevance of this prediction. In particular, it identifies the effect of quality operating on the demand side through the relationship between per capita income and aggregate demand for quality. The model yields predictions for bilateral flows at the sectoral level, and is estimated using cross-sectional data for bilateral trade among 60 countries in 1995. The empirical results confirm the theoretical prediction: rich countries tend to import relatively more from countries that produce high quality goods. The paper also shows that a severe aggregation bias explains the failure of the literature so far to find consistent empirical support for the "Linder hypothesis", the conjectured corollary to the first theory relating product quality and the direction of trade.

Suggested Citation

  • Juan Carlos Hallak, 2004. "Product Quality, Linder, and the Direction of Trade," NBER Working Papers 10877, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10877
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    References listed on IDEAS

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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. Leamer, Edward E. & Levinsohn, James, 1995. "International trade theory: The evidence," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 26, pages 1339-1394 Elsevier.
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    5. repec:hrv:faseco:30722111 is not listed on IDEAS
    6. John Romalis, 2004. "Factor Proportions and the Structure of Commodity Trade," American Economic Review, American Economic Association, vol. 94(1), pages 67-97, March.
    7. Alan Deardorff, 1998. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Chapters,in: The Regionalization of the World Economy, pages 7-32 National Bureau of Economic Research, Inc.
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    12. Juan Carlos Hallak, 2003. "The Effect of Cross-Country Differences in Product Quality on the Direction of International Trade 2002," Working Papers 493, Research Seminar in International Economics, University of Michigan.
    13. Francois, Joseph F & Kaplan, Seth, 1996. "Aggregate Demand Shifts, Income Distribution, and the Linder Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 244-250, May.
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    Cited by:

    1. Brooks, Eileen L., 2006. "Why don't firms export more? Product quality and Colombian plants," Journal of Development Economics, Elsevier, vol. 80(1), pages 160-178, June.
    2. Albert Park & Dean Yang & Xinzheng Shi & Yuan Jiang, 2010. "Exporting and Firm Performance: Chinese Exporters and the Asian Financial Crisis," The Review of Economics and Statistics, MIT Press, vol. 92(4), pages 822-842, November.
    3. David Hummels & Volodymyr Lugovskyy, 2005. "Trade in Ideal Varieties: Theory and Evidence," NBER Working Papers 11828, National Bureau of Economic Research, Inc.
    4. Harrigan, James, 2010. "Airplanes and comparative advantage," Journal of International Economics, Elsevier, vol. 82(2), pages 181-194, November.
    5. James Harrigan, 2009. "Comment on "Importers, Exporters and Multinationals: A Portrait of Firms in the U.S. that Trade Goods"," NBER Chapters,in: Producer Dynamics: New Evidence from Micro Data, pages 552-555 National Bureau of Economic Research, Inc.
    6. Yo Chul Choi & David Hummels & Chong Xiang, 2006. "Explaining Import Variety and Quality: The Role of the Income Distribution," NBER Working Papers 12531, National Bureau of Economic Research, Inc.
    7. Miria Pigato, 2009. "Strengthening China's and India's Trade and Investment Ties to the Middle East and North Africa," World Bank Publications, The World Bank, number 2626, April.

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    JEL classification:

    • F1 - International Economics - - Trade

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