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Import Prices, Income, and Inequality

  • Eddy Bekkers

    ()

    (The Vienna Institute for International Economic Studies, wiiw)

  • Joseph F. Francois

    ()

    (The Vienna Institute for International Economic Studies, wiiw)

  • Miriam Manchin

We compare three theoretical explanations for the positive empirical relationship between importer income per capita and traded goods prices. A first explanation is that consumers with higher incomes demand higher quality goods with higher prices. A second explanation is that wealthier people exhibit an increased willingness to pay for necessary goods as more goods enter the consumption set in a hierarchic demand system, and can thus be charged higher markups. A third explanation is that consumers with higher incomes are more finicky regarding their preferred variety in an ideal variety framework and can thus be charged higher markups. We discriminate between these three theories by focusing on the effect of income inequality on trade prices. Based on a large dataset with bilateral HS6 level data on 1260 final goods categories from more than 100 countries between 2000 and 2004, we find a highly significant negative effect of income inequality on unit values. This contradicts both the demand for quality and finickyness theories, while providing support for the increased willingness to pay theory linked to hierarchic demand. These findings on income inequality do not falsify the quality expansion model and the ideal variety model per se. However, the results do argue for place of importance of hierarchic demand.

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Paper provided by The Vienna Institute for International Economic Studies, wiiw in its series wiiw Working Papers with number 82.

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Length: 44 pages including 4 Tables
Date of creation: Jun 2012
Date of revision:
Publication status: Published as wiiw Working Paper
Handle: RePEc:wii:wpaper:82
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  10. Choi, Yo Chul & Hummels, David & Xiang, Chong, 2009. "Explaining import quality: The role of the income distribution," Journal of International Economics, Elsevier, vol. 77(2), pages 265-275, April.
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  19. Francois, Joseph F & Kaplan, Seth, 1996. "Aggregate Demand Shifts, Income Distribution, and the Linder Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 244-50, May.
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  21. Ina Simonovska, 2010. "Income Differences and Prices of Tradables: Insights from an Online Retailer," NBER Working Papers 16233, National Bureau of Economic Research, Inc.
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  23. Pham, Cong S., 2008. "Product specialization in international trade: A further investigation," Journal of International Economics, Elsevier, vol. 75(1), pages 214-218, May.
  24. James R. Markusen, 2010. "Putting Per-Capita Income Back into Trade Theory," NBER Working Papers 15903, National Bureau of Economic Research, Inc.
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