Economics Webinar - Gains from Trade and the Food Engel Curve  

This paper examines the extent to which gains-from-trade predictions from commonly-usedtrade theories are consistent with observed household consumption decisions. Our approach isbased on inference from household-level estimation of food Engel curves in the US and in afew other countries. For a given price index as the deflator of income, deviations from foodEngel curves indicate how biased that price index is relative to the true household price index.We construct open-economy price indices based on trade theory and data, evaluate their biasesaccording to our approach, and compare them with the bias of official CPI statistics. We findthat theory-consistent open-economy price indices that account for industry-level heterogeneityand input-output linkages tend to eliminate a large fraction of the bias of CPI.