Why are goods and services more expensive in rich countries? demand complementarities and cross-country price differences

Daniel Murphy ()

No 156, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: Empirical studies show that tradable consumption goods are more expensive in rich countries. This paper proposes a simple yet novel explanation for this apparent failure of the law of one price: Consumers? utility from tradable goods depends on their consumption of complementary goods and services. Monopolistically competitive firms charge higher prices in countries with more complementary goods and services because consumer demand is less elastic there. The paper embeds this explanation within a static Krugman (1980)-style model of international trade featuring differentiated tradable goods. Extended versions of the model can also account for the high prices of nontradable services in rich countries. The paper provides direct evidence in support of this new explanation. Using free-alongside-ship prices of U.S. and Chinese exports, I demonstrate that prices of specific subsets of tradable goods are higher in countries with high consumption of relevant complementary goods, conditional on per capita income and other country-level determinants of consumer goods prices.

Keywords: Price levels; Trade (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-opm
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Working Paper: Why are Goods and Services more Expensive in Rich Countries? Demand Complementarities and Cross-Country Price Differences (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:156

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