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Income Distribution, Product Quality and International Trade

  • Pablo D. Fajgelbaum

    (Princeton)

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    We develop a framework for studying trade in vertically and horizontally and differentiated products. In our model, consumers have heterogeneous incomes and heterogeneous tastes. They purchase a homogeneous good as well as making a discrete choice of quality and variety of a differentiated product. The distribution of preferences in the population generates a nested logit demand structure. These demands are such that the fraction of consumers who buy a higher- quality product rises with income. We use the model to study the pattern of trade between countries that differ in size and income distributions but are otherwise identical. Trade which is driven primarily by demand factors derives from Âhome market e¤ects in the presence of transport costs. When these costs are sufficiently small, goods of a given quality are produced in a single country. The model provides a tractable tool for studying the welfare consequences of trade, transport costs, and trade policy for different income groups in an economy.

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    Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 415.

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    Date of creation: 2011
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    Handle: RePEc:red:sed011:415
    Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
    Fax: 1-314-444-8731
    Web page: http://www.EconomicDynamics.org/society.htm
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