Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute Income Differences and Prices of Tradables

This paper presents novel evidence of price discrimination, using prices of identical goods in 28 countries. I explain the observed phenomenon via non-homothetic preferences, in a model of trade with product differentiation and firm productivity heterogeneity. The model brings theory and data closer along a key dimension: it generates positively related prices of tradables and income, while preserving exporter behavior and trade flows of existing frameworks. It further captures observations that richer countries buy more per product and consume more diverse bundles. Quantitatively, the model suggests that variable markups account for 80% of the positive price-income relationship across 123 countries. members of the Trade and Development Workshop at the University of Minnesota, as well as participants at various seminars and conferences for their comments and suggestions. All remaining errors are mine. Financial support from the Graduate Research Partnership Program Fellowship is gratefully acknowledged. I am grateful to the World Bank for generously providing me with the price data from the 2005 ICP round. The views in this paper are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System.