Demand Structure as a Determinant of International Trade and Structural Change

This dissertation explores the role of demand structure in explaining patterns of international trade and the directions of structural transformations during globalization. In contrary, recent literature in international and development economics has heavily focused on the production side of general equilibrium. In particular, I study the different impacts of the two components of aggregate demand, namely per-capita income and country size, on bilateral trade when preferences are non-homothetic. In addition, I investigate how endogenous demand structure based on human capital endowments induces countries to undergo different patterns of structural change which generate different implications for changes in national productivity. This thesis therefore makes an effort to illustrate some fundamental questions that cannot be fully addressed by solely looking at the supply side effect in international trade and economic development. Chapter One introduces non-homothetic preferences and controls for comparative advantage to a multi-sector, multi-country trade model and yields a structural gravity equation that demonstrates explicitly how per-capita income and country side affect the pattern of bilateral trade differently, and how their effects vary with sectoral characteristics. In Chapter Two, I structurally estimate the gravity model derived from the previous chapter. The reduced-form test utilizing the estimates of sectoral demand elasticities conforms the predictions of the theoretical hypotheses. Counterfactual experiments are also conducted which acknowledge the role of demand non-homotheticity with respect to both per-capita income and country size in better understanding some observed patterns in trade data. Motivated by the systematic relationship between consumer preferences of domestic production over imports and the pattern of industry structural transformation, the final chapter constructs a theoretical model between two trading partners with different skilled labor endowments. The theory incorporates relative preferences, sectoral productivity and structural change within a unified framework and generates stylized predictions on industrial transformation that are consistent with the observed data