Import Prices, Income, and Inequality

47 Pages Posted: 4 Apr 2012

See all articles by Eddy Bekkers

Eddy Bekkers

World Trade Organization (WTO)

Joseph F. Francois

University of Bern - Department of Economics; Centre for Economic Policy Research (CEPR); Vienna Institute of International Economic Studies (WIIW); University of Adelaide - School of Economics

Miriam Manchin

University College London; Centro Studi Luca d'Agliano

Date Written: March 2012

Abstract

We compare three theoretical explanations for the positive empirical relationship between importer income per capita and traded goods prices. A first explanation is that consumers with higher incomes demand higher quality goods with higher prices. A second explanation is that wealthier people exhibit an increased willingness to pay for necessary goods as more goods enter the consumption set in a hierarchic demand system, and can thus be charged higher markups. A third explanation is that consumers with higher incomes are more finicky regarding their preferred variety in an ideal variety framework and can thus be charged higher markups. We discriminate between these three theories by focusing on the effect of income inequality on trade prices. Based on a large dataset with bilateral HS6 level data on 1260 final goods categories from more than 100 countries between 2000 and 2004, we find a highly significant negative effect of income inequality on unit values. This contradicts both the demand for quality and finickyness theories, while providing support for the increased willingness to pay theory linked to hierarchic demand. These findings on income inequality do not falsify the quality expansion model and the ideal variety model per se. However, the results do argue for place of importance of hierarchic demand.

Keywords: Hierarchic Demand, Ideal Variety, Importer Characteristics, Quality Expansion, Unit Values

JEL Classification: F12

Suggested Citation

Bekkers, Eddy and Francois, Joseph F and Manchin, Miriam, Import Prices, Income, and Inequality (March 2012). CEPR Discussion Paper No. DP8911. Available at SSRN: https://ssrn.com/abstract=2034129

Eddy Bekkers (Contact Author)

World Trade Organization (WTO) ( email )

Rue de Lausanne 154
Geneva 21, CH-1211
Switzerland

Joseph F Francois

University of Bern - Department of Economics ( email )

Schanzeneckstrasse 1
Bern, CH-3001
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Vienna Institute of International Economic Studies (WIIW) ( email )

Oppolzergasse 6
A-1010 Vienna
Austria

University of Adelaide - School of Economics ( email )

Adelaide SA, 5005
Australia
+61 8 8303 5540 (Phone)
+61 8 8223 1460 (Fax)

Miriam Manchin

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Centro Studi Luca d'Agliano ( email )

Via Conservatorio 7
Milan, 20122
Italy

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