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American Economic Journal: Macroeconomics: Vol. 3 No. 1 (January 2011)

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Pricing-to-Market and the Failure of Absolute PPP

Article Citation

Alessandria, George, and Joseph P. Kaboski. 2011. "Pricing-to-Market and the Failure of Absolute PPP." American Economic Journal: Macroeconomics, 3(1): 91-127.

DOI: 10.1257/mac.3.1.91

Abstract

We show that deviations from the law of one price in tradable goods are an important source of violations of absolute purchasing power parity. Using highly disaggregated export data, we document systematic international price discrimination: at the US dock, low-income countries pay lower prices. This pricing-to-market is about twice as important as local nontraded inputs for differences in tradable prices. We propose a model of consumer search and pricing-to-market in which consumers in low-income countries have a comparative advantage in nontraded, nonmarket search activities. Evidence from cross-country time-use studies and US export prices supports the model. (JEL E31, F14)

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Authors

Alessandria, George (Federal Reserve Bank of Philadelphia)
Kaboski, Joseph P. (U Notre Dame)

JEL Classifications

E31: Price Level; Inflation; Deflation
F14: Country and Industry Studies of Trade

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