Working Paper: CEPR ID: DP14080
Authors: Eddy Bekkers; Joseph Francois; Miriam Manchin
Abstract: While the literature on traded goods prices emphasizes final goods prices and related consumer theory to explain variation in goods prices with importer characteristics, trade in intermediates actually constitutes about two-thirds of total trade. We propose a mechanism for explaining variations in the prices of intermediates as a function of importer characteristics, wherein production is vulnerable to failure and the probability of failure declines in the quality of intermediates. Higher wages mean a greater opportunity cost of failure, leading to a stronger demand for high-quality intermediates where firms face higher wages. We find empirical support for this mechanism in the case of intermediate goods using IV regressions. In addition, our findings indicate that while the cost of labor explains about one-fifth of variation in imported intermediate prices, it is a non-significant determinant of imported final good prices.
Keywords: traded goods prices; intermediates; trade
JEL Codes: F12; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher labor costs relative to productivity in the importing country (F16) | Higher prices of imported intermediate goods (F69) |
| 10% increase in the price of labor relative to productivity (J39) | 63% increase in the price of imported goods (F69) |
| Wages (J31) | Variation in highly disaggregated intermediate goods prices (E39) |
| Wages (J31) | Final goods prices (E39) |
| Higher imported input prices (F69) | Higher prices of value added or wages (J39) |