Working Paper Series, Department of Economics, Uppsala University
No 2010:7:
World Trade Patterns and Prices: The Role of Productivity and Quality Heterogeneity
Cristiana Benedetti Fasil ()
and Teodora Borota ()
Abstract: This paper analyzes the role of product quality and labor
efficiency in shaping the trade patterns and trade intensities within and
across two groups of countries, the developed and richer North and the
developing South. Taking prices as a proxy for quality, recent empirical
literature identifies a positive relation between income per capita and
both export and import prices, suggesting that rich countries trade goods
of relatively higher quality. Instead of relying on specific demand side
mechanisms such as non-homothetic preferences, we focus on the North-South
differences in technology. We employ a four country North-South trade model
with two dimensions of firm heterogeneity. Differences in firms’ product
qualities and cost efficiencies result in a price distribution generating
different consumption bundles and the observed export and import prices
across rich and poor countries. Furthermore, the resulting total
expenditure allocation across quality shows that the North (South) spends a
larger share of its income on high (low) quality even with the same
homothetic preferences across regions.
Keywords: International trade patterns; North-South trade; import and export prices; heterogeneous firms; product quality; (follow links to similar papers)
JEL-Codes: F10; F12; F14; L11; L15; (follow links to similar papers)
24 pages, April 15, 2010
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