Love for Quality, Comparative Advantage, and Trade

Esteban Jaimovich and Vincenzo Merella

No 216, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: We propose a theory of trade in which comparative advantages reveal themselves gradually over the path of development. Following the Ricardian tradition, countries specialise and export the set of goods they are able to produce at relatively lower cost given their exogenous initial endowments. However, we introduce two new features into a Ricardian trade model with horizontally and vertically differentiated goods. First, individuals have nonhomothetic preferences in that their willingness to pay for quality rises with their income. Second, heterogeneities in productivity become more pronounced at higher levels of quality of production. As a result, our theory predicts that the scope for international trade widens and productive specialisation increases as real incomes grow and wealthier consumers raise the quality of their consumption baskets. Our predictions find empirical support in a number tests performed using bilateral trade data at the product level.

Keywords: International Trade; Nonhomothetic Preferences; Quality Ladders (search for similar items in EconPapers)
JEL-codes: F11 F43 O40 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2011, Revised 2012
New Economics Papers: this item is included in nep-int and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Love for quality, comparative advantage, and trade (2015)
Working Paper: Love for Quality, Comparative Advantage, and Trade (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:216

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