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S. income inequality has a significant effect on U.S. demand for imports. They chose vertically differentiated products to study trade and income. They found that U.S. income disparities do have a significant effect on U.S. imports using their trade model but also could offer alternative explanations for the finding.
Their main argument surrounds around the assumption that the country can domestically produce very high quality of the differentiated product while it imports low quality version of the item from other countries due to the demand in lower income groups. When we say differentiated products, it means that while the product is the same, different income groups would demand different qualities of the same item. In other words income determines quality demanded. So while the country itself has enough of the high quality version, it doesn't have the same item available in low quality and hence needs to import.
Based on their findings, the hypothesis is proven correct as they explain, "…according to our range of estimates (0.8-1.2), had inequality in the U.S. remained at its 1975 level, imports in 1996 would have been lower between 12 and 19% of the fitted value (which is close to the actual value). The further rise in inequality since 1996 implies that had inequality in 2004 been at its 1975 level, the percentage decline in U.S. imports in 2004 would have been even larger than in 1996, thus implying a very large improvement in the U.S. current account deficit."
They researchers also investigated the relationship between aggregate imports, income relative process and inequality in the long run and found them to be closely linked. They also discovered that "the influence of inequality is quantitatively very important as well."
In the second article studied for this paper, the author Imad Jabir focused on the exploration of a relationship between oil imports, GDP and domestic crude oil production. They found that increase in GDP leads to higher crude oil imports and while it was previously believed that the latter had a positive impact on the former, Jabir found that it was the other way around because higher GDP is directly connected with high oil imports. The country chooses to import more and needs to import more too to increase production in different industries and meet the demand for various products. But there is also an important factor which cannot be ignored. According to the article, the level of domestic oil production together with GDP determines the level of oil imports.
Based on these articles we find that income has a connection with imports but there are other factors which tend to affect U.S. imports along with level of income. For example, we find that while oil imports increase when income increases, the level of imports could remain the same had the domestic oil production increased with the income. Interestingly we discover through these two articles that while higher income leads to higher imports in high quality items, the reverse is true for low quality items. But what would be even more correct to say is that when income increases, there is an increase or decrease in the import of an item depending on variety of two important factors i.e. demand for the item after the increase and production of the item domestically.
We can prove this with the help of an example.
Let us suppose that a is a high quality item being adequately produced by the U.S.B is the low quality version of the same product or some other product that is high in demand but is not being produced sufficiently at home. When income increases, the level of a import is likely to go up while level of B. imports will go down provided the production level of a remains the same domestically and doesn't go up. Else, there would be no significant increase in imports of a because domestic production would be able to accommodate increasing demand.
Bela Balassa. TRADE BETWEEN DEVELOPED and DEVELOPING COUNTRIES': THE DECADE AHEAD. Accessed online http://www.oecd.org/dataoecd/62/19/2501905.pdf
OECD Economic Outlook 2004/1 No. 75, June by Organization for Economic Co-Operation and Development (Jun 30, 2004)
Houthakker, H.S. And Stephen Magee, "Income and Price Elasticities in World Trade,." Review of Economics and Statistics, 51: pp. 111-125, 1969.
Houthhaker and Magee 1969[continue]
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