World Trade Patterns and Prices: The Role of Productivity and Quality Heterogeneity

This paper analyzes the role of productivity and quality in shaping the trade patterns and trade intensities within and across two groups of countries, the developed and richer North and the developing South. Taking prices as a proxy for quality, recent empirical literature identifies a positive relation between income per capita and both export and import prices, suggesting that rich countries trade goods of relatively higher quality. Instead of relying on specific de-mand side mechanisms such as non-homothetic preferences for explaining these findings, we focus on the supply side and North-South differences in technology as the key determinants of trade specialization over quality. We employ a four country North-South trade model with two dimensions of firm heterogeneity. Differences in firms ’ product qualities and cost efficiencies result in a price distribution which, when the fixed cost of trade is applied, generate different consumption bundles and the predicted export and import prices across income levels. Further-more, the resulting total expenditure allocation across quality shows that the North (South) spends a larger share of its income on high (low) quality even with the same homothetic pref-erences across regions