The Income Elasticity of Import Demand: Micro Evidence and An Application
We construct a synthetic panel of household expenditures from the Consumer Expenditure Survey (CEX) and use the Quadratic Almost Ideal Demand System to estimate expenditure shares and income elasticities of demand that vary by good-income-time. We show that the size and distribution of income shocks drives expenditure change in a manner that varies profoundly across traded goods. Our estimates of expenditure shares and income elasticities could be useful in many applications that seek to explain changes in trade behavior from the demand side, and indicate the strong sensitivity of trade to changes in the tails of the income distribution. We explore an application involving the Great Trade Collapse. Income-induced expenditure changes are positively correlated with the cross-good pattern of import changes, generating a predicted change 40% as large as the raw variation in import declines.
We thank Thibault Fally, Anson Soderbery, Chong Xiang, Masha Brussevich and Kan Yue for helpful comments and suggestions. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
David Hummels & Kwan Yong Lee, 2018. "The Income Elasticity of Import Demand: Micro Evidence and An Application," Journal of International Economics, .