Cristiana Benedetti Fasil
() and Teodora Borota
Cristiana Benedetti Fasil: European University Institute, Postal: Via della Piazzuola 43, 50133 Firenze, Italy
Teodora Borota: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
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.
24 pages, April 15, 2010
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