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Per capita income and the extensive margin of bilateral trade
Author(s) -
Hepenstrick Christian,
Tarasov Alexander
Publication year - 2015
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/caje.12154
Subject(s) - economics , margin (machine learning) , intuition , per capita income , per capita , bilateral trade , econometrics , international economics , monetary economics , international trade , population , demography , machine learning , sociology , computer science , philosophy , epistemology , law , political science , china
This paper quantitatively explores the role of demand in explaining the positive correlation between an importer's per capita income and the extensive margin of bilateral trade. The theoretical mechanism is based on agents that increase the set of goods they consume with income. This affects the structure of a country's import demand and therewith the extensive margin of trade. We formalize this intuition by incorporating preferences that allow for binding non‐negativity constraints into an otherwise standard Ricardian multi‐country model. We quantify the model and find that the behaviour of the model's extensive margin of trade is consistent with the data.