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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
Income differences and prices of tradables
Ina Simonovska
Abstract

This paper presents novel evidence of price discrimination, using prices of identical goods in 28 countries. I explain the observed phenomenon via non-homothetic preferences, in a model of trade with product differentiation and firm productivity heterogeneity. The model brings theory and data closer along a key dimension: it generates positively related prices of tradables and income, while preserving exporter behavior and trade flows of existing frameworks. It further captures observations that richer countries buy more per product and consume more diverse bundles. Quantitatively, the model suggests that variable markups account for 80 percent of the positive price-income relationship across 123 countries.


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Ina Simonovska, Income differences and prices of tradables, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 55, 2010.
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Keywords: Price discrimination ; Pricing ; International trade - Econometric models ; Income
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