TY  - JOUR
AU  - Fajgelbaum,Pablo D.
AU  - Grossman,Gene M.
AU  - Helpman,Elhanan
TI  - Income Distribution, Product Quality, and International Trade
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15329
PY  - 2009
Y2  - September 2009
UR  - http://www.nber.org/papers/w15329
L1  - http://www.nber.org/papers/w15329.pdf
N1  - Author contact info:
Pablo Fajgelbaum
UCLA
E-Mail: PFajgelbaum@econ.ucla.edu

Gene M. Grossman
International Economics Section
Department of Economics
Princeton University
Princeton, NJ 08544
Tel: 609/258-4823
Fax: 609/258-1374
E-Mail: grossman@princeton.edu

Elhanan Helpman
Department of Economics
Harvard University
1875 Cambridge Street
Cambridge, MA 02138
Tel: 617-495-4690
Fax: 617-495-7730
E-Mail: ehelpman@harvard.edu
AB  - We develop a framework for studying trade in vertically and horizontally differentiated products. In our model, consumers with heterogeneous incomes and tastes purchase a homogeneous good as well as making a discrete choice of quality and variety 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. The model helps to explain why richer countries export higher-quality goods. It provides a tractable tool for studying the welfare consequences of trade, transport costs, and trade policy for different income groups in an economy.
ER  -