Research in international trade increasingly points to product quality as an influential determinant of micro- and macroeconomic outcomes. Unfortunately, progress in this area is hampered by the fact that reliable estimates of product quality do not exist for a wide range of countries, industries and years. This project addresses this need by developing a theory-based methodology for identifying countries' unobserved product quality from their observable trade flows. Once this methodology is sufficiently refined, the investigators intend to use the estimates derived from it to study both the factors that promote quality growth as well as the influence that such growth has on international trade and economic development. As part of the proposed research, the investigators plan to set up and maintain an international product quality database that will be made available to researchers via the web.
Recent studies have related product quality to countries' skill premia, firms' export success, macroeconomic growth and patterns of trade and specialization. The majority of these studies confront the absence of reliable measures of product quality by constructing ad hoc proxies, the most common of which is based solely on comparisons of countries' export unit values. Export prices, however, can vary for reasons other than quality, particularly when goods exhibit horizontal as well as vertical differentiation. This project will provide the first structural methodology for using readily available international trade datasets to decompose observed export unit values into quality versus quality-adjusted price components. Preliminary results suggest that changes in countries' export unit values over time are often a poor indicator of the evolution of their product quality.
Broader Impacts: A reliable methodology for estimating countries' product quality will have an impact on fields outside of international trade, including development, growth, productivity and macroeconomics. As in international trade, empirical work on the influence of product quality in these fields has been hindered by a lack of data. This project promotes empirical investigation into the determinants and implications of cross-country variation in product quality by making estimates of product quality available to the academic community. Empirical investigation, in turn, spurs further theoretical research. These estimates also may be useful for addressing issues of public policy. The distributional consequences of international trade implied by the Stolper-Samuelson theorem, for example, cannot be properly identified if the import and export price changes used to compute real wages do not properly account for changes in product quality. Quality adjustment is also critical for the construction of real national accounts aggregates and related measures of economic performance, such as those contained in the Penn World Tables. One promising application of these results might be the construction of quality-adjusted measures of countries' terms-of-trade and the import and export price indexes upon which they are based.
