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Love for Quality, Comparative Advantage, and Trade

  • Vincenzo Merella

    (University of Cagliari)

  • Esteban Jaimovich

    (University of Surrey)

We propose a Ricardian trade model with horizontal and vertical differentiation, where individuals' willingness to pay for quality rises with their income, and productivity differentials across countries are stronger for high-quality goods. Our theory predicts that the scope for trade widens and international specialisation intensifies as incomes grow and wealthier consumers raise the quality of their consumption baskets. This implies that comparative advantages intensify gradually over the path of development as a by-product of the process of quality upgrading. The evolution of comparative advantages leads to specific trade patterns that change over the growth path, by linking richer importers to more specialised exporters. We provide empirical support for this prediction, showing that the share of imports originating from exporters exhibiting a comparative advantage in a specific product correlates positively with the importer's GDP per head.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 244.

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Date of creation: 2013
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Handle: RePEc:red:sed013:244
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