Income Inequality and Variety of Imports
Empirical study shows a strong positive relationship between a country’s variety of imports and its income level. Richer countries tend to import more types of goods, as well as higher quantities, than poor ones. A standard CES utility model can not predict this relationship without assuming high fixed export costs. A nonhomothetic model, on the other hand, delivers the correct sign but is inconsistent with the fact that variety of imports is negatively correlated with income inequality within a country (measured by Gini coeffcient). This paper weaves the two facts together into a coherent whole by introducing heterogeneous households in a nonhomothetic utility model, hence connects the import pattern to both across and within country income.