Inequality, Nonhomothetic Preferences, And Trade: A Gravity Approach

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

No 606, Working Papers from Department of Economics, University of Missouri

Abstract: We construct the first direct classification of goods as luxuries or necessities that iscompatible with international trade data. We then use it to test an idea that has not beentested directly in the literature: countries income distributions are important determinants of their import demand, and in particular of the difference in their import demands of luxuries versus necessities. We interpret this result with the aid of a model in which preferences are nonhomothetic, thus relaxing a long-held and standard but empirically dubious assumption in the theory of international trade. Our model is strongly borne outby the results: imports of luxuries increase with importing countrys inequality, andimports of necessities decrease with it. Our calculations imply that if income distributionin the United States became as equal as in Canada, the US would import about 9 13% less in luxury goods and 13 19% more in necessity goods.

Keywords: nonhomothetic tastes; gravity equation; inequality; luxuries; necessities (search for similar items in EconPapers)
JEL-codes: D12 F12 (search for similar items in EconPapers)
Pages: 35 pgs.
Date: 2006-04-26, Revised 2006-05-08
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Inequality, Nonhomothetic Preferences, and Trade: A Gravity Approach (2008)
Working Paper: Inequality, Nonhomothetic Preferences, and Trade: A Gravity Approach (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:umc:wpaper:0606

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