Gains from Trade and the Food Engel Curve

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.

Chong Xiang is Professor of Economics at Purdue. He has a diverse range of research interests, including how we should evaluate the qualities of educational systems across countries; how globalization and technology affect health, wages and inequality; how size and time contribute to comparative advantage; and what factors shape the global trade in motion pictures and the globalization of Christianity. His research is published in such academic journals as the American Economic Review, Journal of International Economics, and Review of Economics and Statistics, and featured in such media outlets as the Washington Post, CTV news (Canada), and Public Ratio (U.S.).