Inequality, Nonhomothetic Preferences, and Trade: A Gravity Approach
Gebze Yuksek Teknoloji Enstitusu; Syracuse University - Department of Economics
Syracuse University - Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)
University of Missouri at Columbia - Department of Economics; National Bureau of Economic Research (NBER)
NBER Working Paper No. w10800
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.
Number of Pages in PDF File: 36working papers series
Date posted: October 8, 2004
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