They chose vertically differentiated products to study trade and income. They found that U.S. income disparities do have a significant effect on U.S. imports using their trade model but also could offer alternative explanations for the finding.
Their main argument surrounds around the assumption that the country can domestically produce very high quality of the differentiated product while it imports low quality version of the item from other countries due to the demand in lower income groups. When we say differentiated products, it means that while the product is the same, different income groups would demand different qualities of the same item. In other words income determines quality demanded. So while the country itself has enough of the high quality version, it doesn't have the same item available in low quality and hence needs to import.
Based on their findings, the hypothesis is proven correct as they explain, "…according to our range of estimates (0.8-1.2), had inequality in the U.S. remained at its 1975 level, imports in 1996 would have been lower between 12 and 19% of the fitted value (which is close to the actual value). The further rise in inequality since 1996 implies that had inequality in 2004 been at its 1975 level, the percentage decline in U.S. imports in 2004 would have been even larger than in 1996, thus implying a very large improvement in the U.S. current account deficit."
They researchers also investigated the relationship between aggregate imports, income relative process and inequality in the long run and found them to be closely linked. They also discovered that "the influence of inequality is quantitatively very important as well."
In the second article studied for this paper, the author Imad Jabir focused on the exploration of a relationship between oil imports, GDP and domestic crude oil production. They found that increase in GDP leads to higher crude oil imports and while it was previously believed that the latter had a positive impact on the former, Jabir found that it was the other way around because higher GDP is directly connected with high oil imports. The country chooses to import more...
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