Shahroo Malik

This study explores the impact of export quality on the exports of a developing and a developed country. I developed a theoretical framework, using the two-country oligopolistic model with quality differentials in product. I find that enhancing export quality improves export performance of a country but it reduces domestic trade under certain conditions. I then test the theoretical findings empirically, using annual inter-country and intra-country trade data for 142 countries from 1963 – 2014 and by applying the gravity model of trade. I also use IMF’s Export Quality Index and Unit Value of exports to estimate a two-stage gravity model to examine the effects of producer prices and exports quality on both exports and domestic trade. My empirical findings are consistent with my theoretical predictions. The empirical findings suggest that quality has a positive impact on international trade and a 1% increase in quality leads to an increase in total exports by 1.08%. A 1% increase in quality leads to a fall in intranational trade by 2.69%. The effect of improving export quality on the exports is more pronounced for OECD countries than the non-OECD countries. This study also discusses the policy measures that developing countries should take to compete effectively in the international market and break the cycle of over reliance on low quality export goods and achieve higher economic growth.

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