Saturday, 26 April 2008

Does Trade with China benefit the poor in America

The topic of income inequality in the US and who to blame always rears it's head in some form or other whenever the US enters a downturn. This time however, we get to see a little of the other side of the story - do the poor in the US gain from having cheaper goods - you bet.

There is nothing surprising in these results which intuitively fit with my priors. Still, it is good to see high quality research in this area.

This new working paper by Christian Broda (University of Chicago, GSB and NBER) and
John Romalis (University of Chicago, GSB and NBER) is worth a read.

Inequality and Prices: Does China Benefit the Poor in America? [PDF]

Over the past three decades there has been a spectacular rise in income inequality as measured by official statistics. In this paper we revisit the distributional consequences of increased imports from China by looking at the compositional differences in the basket of goods consumed by the poor and the rich in America. Using household data on non-durable consumption between 1994 and 2005 we document that much of the rise of income inequality has been offset by a relative decline in the price index of the poor. By relaxing the standard assumptions underlying the
representative agent framework we find that inflation for households in the lowest tenth percentile of income has been 6 percentage points smaller than inflation for the upper tenth percentile over this period. The lower inflation at low income levels can be explained by three factors: 1) The poor consume a higher share of non-durable goods —whose prices have fallen relative to services over this period; 2) the prices of the set of non-durable goods consumed by the poor has fallen relative to that of the rich; and 3) a higher proportion of the new goods are purchased by the poor. We examine the role played by Chinese exports in explaining the lower inflation of the poor. Since Chinese exports are concentrated in low-quality non-durable products
that are heavily purchased by poorer Americans, we find that about one third of the relative price drops faced by the poor are associated with rising Chinese imports.

4 comments:

Bill said...

This paper discussed the impact on prices by trade with China, and not mentioning the alternatives to trade with other third world countries. Yes, Chinese goods are inexpensive. And it got that way just because Chinese government willing to sacrifice the welfare of the workers for trade, not because China is the ONLY country able to manufacture those goods. But what if we tighten the rules about goods we buy, and start sourcing goods from other third world countries, will we still get the same price advantage ? If not, why not ?

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