NBER WORKING PAPER SERIES ESTIMATING CROSS-COUNTRY DIFFERENCES IN PRODUCT QUALITY

We develop a method for decomposing countries' observed export prices into quality versus qualityadjusted-price components using information contained in their trade balances. Holding observed export prices constant, countries with surpluses are inferred to offer higher quality than countries running deficits. Our method accounts for variation in trade balances induced by horizontal and vertical differentiation. We use our method to examine manufacturing product quality among the world's top exporters from 1989 to 2003. We find that the initial quality gap between highand low-income countries is smaller than their initial income gap, and that the former narrows considerably faster over time. Juan Carlos Hallak Universidad de San Andrés Departamento de Economía Vito Dumas 284 (B1644BID) Victoria, Provincia de Buenos Aires ARGENTINA and NBER jchallak@udesa.edu.ar Peter K. Schott Yale School of Management 135 Prospect Street New Haven, CT 06520-8200 and NBER peter.schott@yale.edu

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