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Gene Grossman, Princeton Print
Wednesday, 04 November 2009, 12:15 - 13:15

Income Distribution, Product Quality and International Trade

Abstract:  We develop a framework for studying trade in horizontally and vertically differentiated products. In our model, consumers have heterogeneous incomes and heterogeneous tastes. They purchase a homogeneous good as well as making a discrete choice of quality and brand 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. When these costs are sufficiently small, goods of a given quality are produced in a single country. The model provides a tractable framework for studying the welfare consequences of trade, transport costs, and trade policy for different income groups in an economy.

Gene Grossmann, Princeton University

Location: S 12.227
Contact: Claude Adan, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it