Abstract
We study a trade model with vertical product differentiation with many goods that are heterogeneous in cost and quality and produced in two quality versions. We discuss the composition of high- and low-quality goods in the workers’ consumption baskets in countries between comparable countries. We show that a larger country population fosters its specialization in high-quality production while a higher country productivity leads to specialization in high quality production for all countries. Smaller trade costs foster specialization in high quality exports. We then discuss the effect of population heterogeneity on the consumption baskets and country specialization. Most of those results agree with existing empirical findings.
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The authors thank the Editor C. Arkolakis and two anonymous referees for helpful comments. They are also grateful to F. Etro, A. Fieler, W.-T. Hsu, K. Matsuyama, P. Neary, G. Ottaviano, J. Tharakan and J. Wooton for relevant suggestions. Errors are ours.
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Picard, P.M., Tampieri, A. Vertical differentiation and trade among symmetric countries. Econ Theory 71, 1319–1355 (2021). https://doi.org/10.1007/s00199-020-01295-9
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DOI: https://doi.org/10.1007/s00199-020-01295-9