Per Capita Income and the Quality and Variety of Imports

We investigate how the division of aggregate income into per capita income and population affects the margins of imports. In the first part, we use data on imports of 123 countries to document a positive relationship between per capita income and both the extensive and quality margin of imports, for a given level of aggregate GDP. These relations hold at various levels of disaggregation. While the quantity margin of imports is increasing in per capita income at the disaggregate level, the relation disappears at the aggregate level due to a composition effect. In the second part, we extend Krugman’s (1980) variety model with vertical quality differentiation and non-homothetic consumer behavior. This simple model predicts that the extensive and quality margin of imports jointly increase in per capita income, for given aggregate income, which is consistent with the data. JEL classification: F10, F12, F19