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Per-capita incomes and the extensive margin of bilateral trade

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Listed author(s):
  • Christian Hepenstrick

Abstract

This paper argues that the per-capita income of importers is an important determinant of the extensive margin of trade. I formalize this by incorporating preferences that allow for binding nonnegativity constraints into an otherwise standard Ricardian model. This implies that agents adjust the set of goods from which they consume with income, which in turn affects the extensive margin of bilateral trade. I quantify the model using data on US consumer behavior and aggregate values of bilateral trade flows. I find that the behavior of the model’s extensive margin of bilateral trade is consistent with elasticities measured in the data. Two counterfactual experiments demonstrate the quantitative importance of the mechanism outlined in this paper.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 519.

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Date of creation: Nov 2010
Handle: RePEc:zur:iewwpx:519
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Find related papers by JEL classification:
  • F10 - International Economics - - Trade - - - General
  • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
  • F19 - International Economics - - Trade - - - Other

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  2. Costinot, Arnaud & Komunjer, Ivana, 2006. "What Goods Do Countries Trade? New Ricardian Predictions," University of California at San Diego, Economics Working Paper Series qt86n316hw, Department of Economics, UC San Diego.
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  5. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
  6. Reto Foellmi & Christian Hepenstrick & Josef Zweimüller, 2010. "Non-homothetic preferences, parallel imports and the extensive margin of international trade," Diskussionsschriften dp1009, Universitaet Bern, Departement Volkswirtschaft.
  7. Dollar, David & Kraay, Aart, 2002. "Growth Is Good for the Poor," Journal of Economic Growth, Springer, vol. 7(3), pages 195-225, September.
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  21. Wanki Moon & Wojciech Florkowski & Larry Beuchat & Anna Resurreccion & Pavlina Paraskova & Jordan Jordanov & Manjeet Chinnan, 2002. "Demand for food variety in an emerging market economy," Applied Economics, Taylor & Francis Journals, vol. 34(5), pages 573-581.
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  27. Choi, Yo Chul & Hummels, David & Xiang, Chong, 2009. "Explaining import quality: The role of the income distribution," Journal of International Economics, Elsevier, vol. 78(2), pages 293-303, July.
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Cited by:

  1. Behrens, Kristian & Murata, Yasusada, 2012. "Globalization and individual gains from trade," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 703-720.
  2. Maria Masood, 2015. "New Evidence on Development and the Diversity of Cultural Imports," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 15012, Institut d'Economie et Econométrie, Université de Genève.
  3. Foellmi, Reto & Hepenstrick, Christian & Zweimüller, Josef, 2017. "International arbitrage and the extensive margin of trade between rich and poor countries," Economics Working Paper Series 1703, University of St. Gallen, School of Economics and Political Science.
  4. Maria MASOOD, 2014. "New Evidence on Development and Cultural Trade: Diversification, Reconcentration and Domination," Working Papers P85, FERDI.
  5. Christian Hepenstrick & Alexander Tarasov, 2015. "Trade Openness and Cross-country Income Differences," Review of International Economics, Wiley Blackwell, vol. 23(2), pages 271-302, 05.
  6. Kristian Behrens & Yasusada Murata, 2012. "Globalization and Individual Gains from Trade (revised version)," Cahiers de recherche 1218, CIRPEE.
  7. repec:lmu:muenec:15421 is not listed on IDEAS
  8. 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.

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