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GTAP Resource #3295

"Import Prices, Importer Income, and Importer Income Inequality: Comparing Competing Theories"
by Bekkers, Eddy, Joseph Francois and Miriam Manchin

Empirically, there is a strong positive effect of income per capita in the importing country on unit values of trade. Three theoretical channels along which income per capita affects unit values are modeled. Considering the effect of income inequality in the importing country using the Atkinson index of inequality, we discriminate between the three channels. The predictions of only one of the three channels is in accordance with empirical findings. A first channel is increased demand for quality as income rises with utility expanding both in quantity and quality. A second channel, drawing on existing work, holds that higher incomes are more finicky to consume their ideal variety in an ideal variety approach and can thus be charged higher markups. A third channel is modeled in a hierarchic demand system with agents having an increased willingness to pay for necessary goods as more commodities enter the consumption set. In the first two channels increasing income inequality leads to higher average unit values, whereas in the last channel income inequality decreases average unit values. Both in the quality model and the circle model unit values of trade rise with income inequality, whereas in the hierarchic demand model unit values decline in income inequality. Using a large panel dataset based on more than 200 countries, we find empirically a highly significant negative effect of income inequality on unit values, thus providing support for the hierarchic demand model.

Resource Details (Export Citation) GTAP Keywords
Category: 2010 Conference Paper
Status: Published
By/In: Presented at the 13th Annual Conference on Global Economic Analysis, Penang, Malaysia
Date: 2010
Created: Bekkers, E. (4/14/2010)
Updated: Bekkers, E. (6/6/2010)
Visits: 2,005
No keywords have been specified.

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