Heterogeneous welfare gains from import variety across regions: evidence from South Korea

ABSTRACT

Globalization has differential impacts on trade patterns and welfare gains across regions within a country. Using panel data on 16 South Korean regions over the period 2000–2015, this study shows that new import varieties led to lower regional import prices, which in turn yielded positive welfare gains. However, both the uneven growth of import varieties and different degrees of product differentiation led to heterogeneous effects on import prices and welfare gains across regions. Regional differences in import prices and welfare gains are impacted more by variety growth than by product differentiation.

KEYWORDS:

• Import variety
• import price
• gains from variety
• regional difference

JEL CLASSIFICATION:

• F12
• F14
• R12
• R13

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ Goldberg and Pavcnik (2007), Fajgelbaum, Grossman, and Helpman (2011), Mohler and Seitz (2012), Fajgelbaum and Khandelwal (2016), Broda, Greenfield, and Weinstein (2017), and Atkin, Faber, and Gonzalez-Navarro (2018).

² The NEG (New Economic Geography) models initiated by Krugman (1991) and Fujita, Krugman, and Venables (1999) have only focused on ‘macro-heterogeneity’ across space, but the ‘new’ NEG models (Baldwin and Okubo 2005; Ottaviano 2011; Handbury and Weinstein 2015; Accetturo et al. 2018) have documented the role of ‘micro-heterogeneity’, investigating the intensity of agglomeration and its economic effects across space.

³ The ideal definition of a variety is a firm-brand, such as Mondavi wine versus Bordeaux wine. However, survey data usually covers a few products for a few years. Researchers confront a serious limitation and then use trade data classified by SITC or HS system to implement their macro-level studies.

⁴ Using the standard trade data in a sub-national level inevitably comes with a problem taking no account of inter-regional movements of intermediate and final goods. The change in regional import varieties may be over- or under- calculated.

⁵ This is equivalent to arguments in New Economic Geography (NEG) studies that larger cities offer consumers more products (Krugman 1991; Ottaviano, Tabuchi, and Thisse 2002; Handbury and Weinstein 2015). Particularly, Handbury and Weinstein (2015) proved that small cities offer consumers a much smaller array of available goods, and the price level tends to be lower in larger cities, using data on purchase transactions by households in 49 U.S. cities.

⁶ This result implies a convergence in import varieties and welfare among regions, which supports the argument that the world is becoming flatter from the perspective of economic geography (Friedman 2005; McCann 2008).

⁷ Due to the Proposition 1 from Feenstra (1994), the import price index incorporating changes in varieties of a good is defined as a conventional import price index times an additional term. The additional term is composed of the lambda ratio and the elasticity of substitution between varieties of the good.

⁸ Using import shares rather than quantities makes handling measurement errors in unit values easier.

⁹ Feenstra (1994) suggested a ‘reduced-form’ supply curve. Since the demand equation is expressed in terms of expenditure shares and first differences, the supply equation is also defined by the equilibrium price in first difference.:

¹⁰ The lambda ratio to measure the variety growth for a good is more sophisticated than counting the number of varieties in Table 2 because it considers the importance of different varieties in total imports by using import shares as weights.

¹¹ However, these outliers have no effect on the welfare gains because the goods with high elasticities are homogeneous.

¹² They estimated and categorized the elasticities of substitution between import varieties by following Rauch (1999)’s classification of goods into three groups: homogeneous, reference priced, and differentiated. Homogeneous goods have high elasticities of substitution because they are very substitutable.

¹³ Put differently, measuring import prices without taking into account changes in the import variety leads to an over-estimation of the exact import price index.

¹⁴ Since this is the first study to investigate regional welfare gains from import variety, there are no comparable studies. However, we can compare our results to some extent with studies that measure welfare gains for an entire country. For example, 2.6% (US) in Broda and Weinstein (2006), 4.9% (China) in Chen and Ma (2012), and −1.56 ~ 2.8% (EU countries) in Mohler and Seitz (2012).

Additional information

Funding

The work was supported by a 2019 Yeungnam University research grant.