Why are rich countries exporting high quality goods?

This paper proposes a new model of international trade and quality differentiation that explains why rich countries produce and export goods of higher quality than poor countries. The model is based on an idea from the business literature on quality management. This literature asserts

that interaction with consumers is an essential part of successful quality management as it allows firms to receive feedback on the quality, deficiencies and possible improvements of their products. The model assumes that firms incur a cost for any feedback-generating interaction with consumers. The cost is proportional to the number of consumers, whereas feedback is proportional to the quantity consumed. Because consumers in rich countries consume more per capita, interaction with consumers is less costly for firms located in rich countries, thus giving rich countries a comparative advantage in the production of high quality goods.

For more information, contact Dirk Krueger.