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Similarity of income distributions and the extensive and intensive margin of bilateral trade flows

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  • Claudia Bernasconi

Abstract

This paper investigates empirically how similarity of demand structures - approximated by similarity of income distributions - affects trade patterns along both the extensive and intensive margin. The idea that similarity of demand structures intensifies trade goes back to the well-known Linder hypothesis. Based on a sample of 102 countries, I find that bilateral trade volumes are increasing in the overlap of two countries income distributions. This effect is driven by both the extensive and intensive margin. I establish two novel measures of income similarity - the average income level of the overlap area and the range of incomes for which two distributions overlap - and document that both are important determinants of bilateral trade margins. My analysis shows that the positive relationship between similarity of income distributions and bilateral trade margins is present at the aggregate and disaggregate level of trade flows.

Suggested Citation

  • Claudia Bernasconi, 2013. "Similarity of income distributions and the extensive and intensive margin of bilateral trade flows," ECON - Working Papers 115, Department of Economics - University of Zurich.
  • Handle: RePEc:zur:econwp:115
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    References listed on IDEAS

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    Cited by:

    1. Hendrik W. Kruse, 2020. "Revisiting the sectoral Linder hypothesis: Aggregation bias or fixed costs?," Review of International Economics, Wiley Blackwell, vol. 28(4), pages 1076-1112, September.
    2. Reto Foellmi & Christian Hepenstrick & Zweimüller Josef, 2018. "International Arbitrage and the Extensive Margin of Trade between Rich and Poor Countries," Review of Economic Studies, Oxford University Press, vol. 85(1), pages 475-510.
    3. Auer, Raphael A., 2017. "Product heterogeneity, cross-country taste differences, and the growth of world trade," European Economic Review, Elsevier, vol. 100(C), pages 1-27.
    4. Hendrik W. Kruse, 2016. "Revisiting the Sectoral Linder Hypothesis: Aggregation Bias or Fixed Costs?," LIS Working papers 658, LIS Cross-National Data Center in Luxembourg.
    5. Hartmut Egger & Simone Habermeyer, 2019. "Nonhomothetic preferences and rent sharing in an open economy," CESifo Working Paper Series 7522, CESifo.
    6. Jonathan I. Dingel, 2017. "The Determinants of Quality Specialization," Review of Economic Studies, Oxford University Press, vol. 84(4), pages 1551-1582.

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    More about this item

    Keywords

    Similarity of income distributions; Linder hypothesis; nonhomothetic preferences; extensive and intensive margin of trade; gravity equation;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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