Per Capita Income Demand for Variety, and International Trade: Linder Reconsidered
We analyse a monopolistically competitive model of international trade where goods must be consumed in indivisible amounts. The number of varieties that enter a consumer's optimal consumption bundle is increasing in the consumer's per capita income. We first show that, for a given level of GDP, less populous and richer economies have a larger equilibrium number of product varieties. We then show that in an integrated world, even when total GDP is kept constant in all markets, as the levels of and the similarity in the trading partners' per capita incomes increase, so do the number of varieties exchanged and the volume of bilateral trade flows, as conjectured in the Linder hypothesis. Implications for the distribution of gains from trade between and within countries are also discussed.
June 2000 Paper Number CEPDP0460