Inequality, Nonhomothetic Preferences, and Trade: A Gravity Approach

Muhammed Dalgin, Devashish Mitra () and Vitor Trindade ()

No 10800, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper, we show that inequality is an important determinant of import demand, in that it augments the standard gravity model in a significant way. We interpret this result with the aid of a model in which tastes are nonhomothetic. Classification of products, based on the correlation between household budget shares in the US and income, into "luxuries" and "necessities," works very well in our analysis when we restrict the analysis to developed importing countries. While the imports of luxuries increase with the importing country's inequality, imports of necessities decrease with it. Furthermore, we find that an increase in the level of inequality in the importing country generally leads to an increase in imports from developed countries, and to a reduction in imports from low-income countries.

JEL-codes: F1 (search for similar items in EconPapers)
Date: 2004-09
Note: ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

Published as Muhammed Dalgin & Vitor Trindade & Devashish Mitra, 2008. "Inequality, Nonhomothetic Preferences, and Trade: A Gravity Approach," Southern Economic Journal, Southern Economic Association, vol. 74(3), pages 747-774, January.

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