Import Prices, Importer Income, and Importer Income Inequality: Comparing Competing Theories

Empirical research shows that importer income per capita has a strong positive e¤ect on unit values of trade. In this paper three theoretical models are proposed to explain this empirical _x0085_nding. The e¤ect of importer income inequality on unit values is used to discriminate between the three di¤erent models. The prediction of only one of the three models is in accordance with empirical _x0085_ndings. In a _x0085_rst model the demand for quality rises in income with utility expanding both in quantity and quality. A second model features a hierarchic demand system where agents having an increased willingness to pay for necessary goods as more commodities enter the consumption set and can thus be charged higher markups. In a third model, drawing on existing work on the ideal variety model, higher incomes are more _x0085_nicky to consume their ideal variety and will thus face higher markups. Both in the quality model and the ideal variety model unit values of trade rise with income inequality, whereas in the hierarchic demand model unit values decline in income inequality. Based on a large COMTRADE dataset with HS6 level data from more than 200 countries between 2000 and 2004, we _x0085_nd a highly signi_x0085_cant negative e¤ect of income inequality on unit values, thus providing support for the hierarchic demand model.