Working Paper: NBER ID: w10800
Authors: Muhammed Dalgin; Devashish Mitra; Vitor Trindade
Abstract: 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.
Keywords: Inequality; Trade; Gravity Model; Nonhomothetic Preferences
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inequality in the importing country (F14) | Imports of luxuries (F10) |
| Inequality in the importing country (F14) | Imports of necessities (F10) |
| Income distribution (inequality) (D31) | Trade flows from developed and developing countries (F14) |