Working Paper: NBER ID: w18314
Authors: Robert C. Feenstra; John Romalis
Abstract: The unit values of internationally traded goods are heavily influenced by quality. We model this in an extended monopolistic competition framework where, in addition to choosing price, firms simultaneously choose quality. We allow countries to have non-homothetic demand for quality. The optimal choice of quality by firms reflects this non-homothetic demand as well as the costs of production, including specific transport costs, under the "Washington apples" effect. We estimate the implied gravity equation using detailed bilateral trade data for about 200 countries over 1984-2008. Our system identifies quality and quality-adjusted prices, from which we will construct price indexes for imports and exports for each country that will be incorporated into the next generation of the Penn World Table.
Keywords: Quality; International Trade; Gravity Equation; Price Indexes
JEL Codes: F1; F12; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher quality (L15) | higher prices (D49) |
| longer distances (R12) | higher prices (D49) |
| production costs (D24) | choice of quality (L15) |
| country's level of development (O57) | quality of goods traded (L15) |
| higher quality (L15) | longer distances (R12) |
| higher quality (L15) | quality-adjusted prices (P22) |