Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/267411 
Year of Publication: 
2022
Series/Report no.: 
IZA Discussion Papers No. 15674
Publisher: 
Institute of Labor Economics (IZA), Bonn
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.
Subjects: 
Food Engel Curves
price indices
household-level consumption
gains from trade
JEL: 
D12
F14
E31
Document Type: 
Working Paper

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