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Bounded Love of Variety and Patterns of Trade

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  • Philip Sauré

Abstract

Recent trade data exhibit the following four empirical regularities: (i) countries import only a small fraction of all traded varieties (ii) per capita income and the number of imported varieties correlate positively (iii) per capita income and trade shares correlate positively and, finally, (iv) world trade shares have increased substantially. The present paper argues that standard theories fail to explain at least some of these patterns and subsequently shows that a small and reasonable change in the demand structure can reconcile the New Trade model with the data. Its key assumption imposes an upper bound on consumers' marginal utility from varieties. This implies that consumers purchase only the cheaper share of varieties, while expensive foreign varieties bearing high transport costs are not consumed. Technological progress that increases per capita consumption of those varieties in the consumption basket decreases marginal utility derived from them and induces consumers to extend their consumption to more expensive varieties produced at distant locations. Through this additional margin trade shares increase as productivity grows. Productivity growth is thus identified as a joint determinant of trade shares, the number imported varieties, and per capita income.

Suggested Citation

  • Philip Sauré, 2009. "Bounded Love of Variety and Patterns of Trade," Working Papers 2009-10, Swiss National Bank.
  • Handle: RePEc:snb:snbwpa:2009-10
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Robert C. Feenstra, 2014. "Restoring the Product Variety and Pro-competitive Gains from Trade with Heterogeneous Firms and Bounded Productivity," NBER Working Papers 19833, National Bureau of Economic Research, Inc.
    2. Kropf, Andreas & Sauré, Philip, 2014. "Fixed costs per shipment," Journal of International Economics, Elsevier, vol. 92(1), pages 166-184.
    3. Bekkers, Eddy & Francois, Joseph & Manchin, Miriam, 2012. "Import prices, income, and inequality," European Economic Review, Elsevier, vol. 56(4), pages 848-869.
    4. Christian Hepenstrick, 2010. "Per-capita incomes and the extensive margin of bilateral trade," IEW - Working Papers 519, Institute for Empirical Research in Economics - University of Zurich.
    5. A. Auer, Raphael & Chaney, Thomas & Sauré, Philip, 2018. "Quality pricing-to-market," Journal of International Economics, Elsevier, vol. 110(C), pages 87-102.
    6. Salvador Gil-Pareja & Rafael Llorca-Vivero & José Martínez-Serrano, 2015. "The Uneven Impact of Continental Boundaries on Trade," Open Economies Review, Springer, vol. 26(2), pages 237-257, April.
    7. Tarasov, Alexander, 2009. "Consumer Preferences in Monopolistic Competition Models," MPRA Paper 19990, University Library of Munich, Germany.
    8. repec:eee:soceps:v:58:y:2017:i:c:p:72-86 is not listed on IDEAS
    9. Maria MASOOD, 2014. "New Evidence on Development and Cultural Trade: Diversification, Reconcentration and Domination," Working Papers P85, FERDI.
    10. Alexander Tarasov, 2014. "Preferences and income effects in monopolistic competition models," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 42(3), pages 647-669, March.
    11. Talan İşcan, 2015. "Windfall Resource Income, Productivity Growth, and Manufacturing Employment," Open Economies Review, Springer, vol. 26(2), pages 279-311, April.
    12. Costas Arkolakis & Arnaud Costinot & Dave Donaldson & Andrés Rodríguez-Clare, 2015. "The Elusive Pro-Competitive Effects of Trade," NBER Working Papers 21370, National Bureau of Economic Research, Inc.
    13. Goksel, Turkmen, 2012. "Financial constraints and international trade patterns," Economic Modelling, Elsevier, vol. 29(6), pages 2222-2225.
    14. Christian Hepenstrick & Alexander Tarasov, 2015. "Per capita income and the extensive margin of bilateral trade," Canadian Journal of Economics, Canadian Economics Association, vol. 48(4), pages 1561-1599, November.
    15. Jaimovich, Esteban, 2012. "Import diversification along the growth path," Economics Letters, Elsevier, vol. 117(1), pages 306-310.

    More about this item

    Keywords

    Marginal Utility; Variety;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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