Bounded Love of Variety and Patterns of Trade
Long-run bilateral trade data exhibit four empirical regularities: (i) countries import only a small fraction of all traded varieties, (ii) per capita income and the number of imported varieties correlate positively, (iii) per capita income and trade shares correlate positively and (iv) world trade shares have markedly increased. Standard theories fail to simultaneously explain these patterns. This paper reconciles theory and data by assuming that the consumer’s marginal utility from varieties is bounded. Given this assumption, consumers do not purchase foreign varieties that bear high transport costs. With increasing incomes, however, consumers include more of the latter varieties, which generates the four patterns above.
KeywordsMarginal utility Variety
JEL ClassificationF10 F13
I would like to thank Raphael Auer, Giancarlo Corsetti, Gino Gancia, Omar Licandro, Marco Maffezzoli, Diego Puga, Morten Ravn, Karl Schlag and Jaume Ventura and two anonymous referees for many valuable comments. All remaining errors are mine.
The views expressed in this paper are mine and do not necessarily represent those of the Swiss National Bank.
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