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The Income Elasticity of Import Demand: Micro Evidence and An Application

Listed author(s):
  • David Hummels
  • Kwan Yong Lee

We construct a synthetic panel of household expenditures from the Consumer Expenditure Survey (CEX) and use the Quadratic Almost Ideal Demand System to estimate expenditure shares and income elasticities of demand that vary by good-income-time. We show that the size and distribution of income shocks drives expenditure change in a manner that varies profoundly across traded goods. Our estimates of expenditure shares and income elasticities could be useful in many applications that seek to explain changes in trade behavior from the demand side, and indicate the strong sensitivity of trade to changes in the tails of the income distribution. We explore an application involving the Great Trade Collapse. Income-induced expenditure changes are positively correlated with the cross-good pattern of import changes, generating a predicted change 40% as large as the raw variation in import declines.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23338.

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Date of creation: Apr 2017
Handle: RePEc:nbr:nberwo:23338
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