Estimating Cross-Country Differences in Product Quality

JUAN CARLOS HALLAK; PETER K. SCHOTT

QUARTERLY JOURNAL OF ECONOMICS, THE

Oxford University Press

Año: 2011 vol. 126 p. 417 - 474

0033-5533

We develop a method for decomposing countries´ observed export prices into quality versus quality-adjusted components using information contained in their trade balances. Holding observed export prices constant, countries with trade surpluses are inferred to offer higher quality than countries running trade deficits. Our method accounts for variation in trade balances induced by both horizontal and vertical differentiation, and we use it to estimate the evolution of manufacturing quality for the world´s top exporters from 1989 to 2003. We find that observed unit value ratios can be a poor approximation for relative quality differences, that countries´ quality is converging more rapidly than their income, and that countries appear to vary in terms of displaying "high-quality" versus "low-price" growth strategies.