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Per-capita incomes and the extensive margin of bilateral trade

  • Christian Hepenstrick

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
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Handle: RePEc:zur:iewwpx:519
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  1. 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.
  2. Arnaud Costinot & Ivana Komunjer, 2007. "What Goods Do Countries Trade? New Ricardian Predictions," NBER Working Papers 13691, National Bureau of Economic Research, Inc.
  3. Ina Simonovska, 2009. "Income Differences and Prices of Tradables," 2009 Meeting Papers 692, Society for Economic Dynamics.
  4. Fajgelbaum, Pablo & Grossman, Gene M. & Helpman, Elhanan, 2011. "Income distribution, product quality, and international trade," Policy Research Working Paper Series 5843, The World Bank.
  5. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, May.
  6. Gaulier, Guillaume & Zignago, Soledad, 2004. "Notes on BACI (analytical database of international trade). 1989-2002 version," MPRA Paper 32401, University Library of Munich, Germany.
  7. Mark D. Jekanowski & James K. Binkley, 2000. "Food purchase diversity across U.S. markets," Agribusiness, John Wiley & Sons, Ltd., vol. 16(4), pages 417-433.
  8. Richard Baldwin & James Harrigan, 2011. "Zeros, Quality, and Space: Trade Theory and Trade Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 60-88, May.
  9. Markusen, James R., 2013. "Putting per-capita income back into trade theory," Journal of International Economics, Elsevier, vol. 90(2), pages 255-265.
  10. Hamermesh, Daniel S. & Gronau, Reuben, 2007. "The Demand for Variety: A Household Production Perspective," IZA Discussion Papers 2767, Institute for the Study of Labor (IZA).
  11. Foellmi, Reto & Hepenstrick, Christian & Zweimüller, Josef, 2010. "Non-homothetic preferences, parallel imports and the extensive margin of international trade," CEPR Discussion Papers 7939, C.E.P.R. Discussion Papers.
  12. David Hummels & Peter J. Klenow, 2002. "The Variety and Quality of a Nation's Trade," NBER Working Papers 8712, National Bureau of Economic Research, Inc.
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