Gains from Trade and the Food Engel Curve

Farid Farrokhi, David Jinkins, Chong Xiang

Research output: Working paperResearch

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Abstract

This paper examines the extent to which gains-from-trade predictions from commonly-used trade theories are consistent with observed household consumption decisions. Our approach is based on inference from household-level estimation of food Engel curves in the US and in a few other countries. For a given price index as the deflator of income, deviations from food Engel curves indicate how biased that price index is relative to the true household price index. We construct open-economy price indices based on trade theory and data, evaluate their biases according to our approach, and compare them with the bias of official CPI statistics. We find that theory-consistent open-economy price indices that account for industry-level heterogeneity and input-output linkages tend to eliminate a large fraction of the bias of CPI.
Original languageEnglish
Place of PublicationFrederiksberg
PublisherDepartment of Economics. Copenhagen Business School
Number of pages51
Publication statusPublished - 29 Oct 2022
SeriesWorking Paper / Department of Economics. Copenhagen Business School
Number15-2022

Keywords

  • Food Engel Curves
  • Price Indices
  • Household-level Consumption
  • Gains from Trade

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