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International Prices and Endogenous Quality

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  • Robert C. Feenstra
  • John Romalis

Abstract

The unit values of internationally traded goods are heavily influenced by quality. We model this in an extended monopolistic competition framework where, in addition to choosing price, firms simultaneously choose quality. We allow countries to have non-homothetic demand for quality. The optimal choice of quality by firms reflects this non-homothetic demand as well as the costs of production, including specific transport costs, under the "Washington apples" effect. We estimate the implied gravity equation using detailed bilateral trade data for about 200 countries over 1984-2008. Our system identifies quality and quality-adjusted prices, from which we will construct price indexes for imports and exports for each country that will be incorporated into the next generation of the Penn World Table.

Suggested Citation

  • Robert C. Feenstra & John Romalis, 2012. "International Prices and Endogenous Quality," NBER Working Papers 18314, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18314
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • F1 - International Economics - - Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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