Trade and inequality, revisited — Rooftops edition

Another way of investigating the relationship between inequality and
trade with poor countries implies that China may actually help the
poor, suggests new work from University of Chicago economists Christian Broda and John Romalis.

Instead of focusing purely on what’s produced outside of the
country, Broda and Romalis turn their attention to an interesting but
obvious relationship between imports and consumption within our border:
The goods exported by poorer countries are typically consumed by
lower-income Americans. Our typical methods of quantifying inequality,
however, don’t take this into account.

At the same time, inflation in the price of these goods has fallen
behind inflation in services, which make up a greater portion of what
wealthier people buy. Taken together, these trends imply that official
measures may be overstating the rise in inequality.

Looking at trade data between 1994 and 2005, Broda and Romalis
construct inflation rates for different income groups and find that
rates for the richest outpaced rates for the poorest by about 4 percent
over the period. Since income inequality between the top and bottom 10
percent of earners grew by about 6 percent, the different inflation
rates among income groups wipes out about two-thirds of the rise in

The emphasis in that last sentence is mine.  It continues:

China’s role in this new way of analyzing inequality is large, accounting for about 50 percent of the total reduction.

And scream this part from the rooftops too [how do you scream a parenthesis?]:

(A very interesting aside. Broda and Romalis also find that the poor
are more likely than the rich to buy newer goods. Because of the lag in
how quickly the CPI tracks new products, the researchers argue that
once this "new goods bias"
which serves to keep official inflation rates higher than they actually
are since newer goods are typically cheaper, is factored out,
inequality between the rich and the poor between 1994 and 2005 may not
have changed at all.)

Here is the link.  Again, here is the Broda and Romalis paper.  If this holds up it is big, big news and we must revise many claims that have been made about inequality, trade, and China.


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