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Similarity of income distributions and the extensive and intensive margin of bilateral trade flows


Bernasconi, Claudia (2013). Similarity of income distributions and the extensive and intensive margin of bilateral trade flows. Working paper series / Department of Economics 115, University of Zurich.

Abstract

This paper investigates empirically how similarity of demand structures - approximated by similarity of income distributions - affects trade patterns along both the extensive and intensive margin. The idea that similarity of demand structures intensifies trade goes back to the well-known Linder hypothesis. Based on a sample of 102 countries, I find that bilateral trade volumes are increasing in the overlap of two countries income distributions. This effect is driven by both the extensive and intensive margin. I establish two novel measures of income similarity - the average income level of the overlap area and the range of incomes for which two distributions overlap - and document that both are important determinants of bilateral trade margins. My analysis shows that the positive relationship between similarity of income distributions and bilateral trade margins is present at the aggregate and disaggregate level of trade flows.

This paper investigates empirically how similarity of demand structures - approximated by similarity of income distributions - affects trade patterns along both the extensive and intensive margin. The idea that similarity of demand structures intensifies trade goes back to the well-known Linder hypothesis. Based on a sample of 102 countries, I find that bilateral trade volumes are increasing in the overlap of two countries income distributions. This effect is driven by both the extensive and intensive margin. I establish two novel measures of income similarity - the average income level of the overlap area and the range of incomes for which two distributions overlap - and document that both are important determinants of bilateral trade margins. My analysis shows that the positive relationship between similarity of income distributions and bilateral trade margins is present at the aggregate and disaggregate level of trade flows.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:F10, D31, F14
Uncontrolled Keywords:Similarity of income distributions, Linder hypothesis, nonhomothetic preferences, extensive and intensive margin of trade, gravity equation
Language:English
Date:February 2013
Deposited On:05 Mar 2013 16:06
Last Modified:05 Apr 2016 16:40
Series Name:Working paper series / Department of Economics
Number of Pages:54
ISSN:1664-7041
Official URL:http://www.econ.uzh.ch/static/wp/econwp115.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php
Permanent URL: https://doi.org/10.5167/uzh-76368

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