THE CONTRIBUTION OF NONHOMOTHETIC PREFERENCES TO TRADE

This paper estimates the economic significance of preference nonhomotheticity in international trade. Tastes are assumed to be identical, but budget shares depend on per capita income. A linear expenditure system is estimated for 34 countries over 11 commodity aggregates. A counterfactual exercise is conducted to estimate the volume of trade caused by deviations from homotheticity. The results indicate that nonhomothetic preferences may account for as much as one-quarter of interindustry trade flows. © 1991.