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Income Distribution, Product Quality, and International Trade

Author

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  • Fajgelbaum, Pablo
  • Grossman, Gene M.
  • Helpman, Elhanan
Abstract
We develop a framework for studying trade in vertically and horizontally differentiated products. In our model, consumers with heterogeneous incomes and tastes purchase a homogeneous good as well as making a discrete choice of quality and variety of a differentiated product. The distribution of preferences in the population generates a nested logit demand structure. These demands are such that the fraction of consumers who buy a higher-quality product rises with income. We use the model to study the pattern of trade between countries that differ in size and income distributions but are otherwise identical. Trade - which is driven primarily by demand factors - derives from 'home market effects' in the presence of transport costs. The model helps to explain why richer countries export higher-quality goods. It provides a tractable tool for studying the welfare consequences of trade, transport costs, and trade policy for different income groups in an economy.

Suggested Citation

  • Fajgelbaum, Pablo & Grossman, Gene M. & Helpman, Elhanan, 2011. "Income Distribution, Product Quality, and International Trade," Foerder Institute for Economic Research Working Papers 275739, Tel-Aviv University > Foerder Institute for Economic Research.
  • Handle: RePEc:ags:isfiwp:275739
    DOI: 10.22004/ag.econ.275739
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    More about this item

    Keywords

    Financial Economics; International Relations/Trade;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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