Unit Values in International Trade and Product Quality

Abstract

Is the unit value of traded goods representative of quality? To answer this question, we analyze unit value with respect to exporter country’s capacity to export, which is determined by its production cost, tariff, and distance. The change in a country’s export unit value is decomposed into the components associated with pure term-of-trade effect, quality effect, distance effect, and production cost effect. Our empirical results confirm that tariff, distance, and wages all significantly affect the unit values. Furthermore, by comparing CIF and FOB unit values, we show that quality is an important contributor on driving up the unit values: exporters increase unit price to distant trading partners through quality upgrading. This "Washington apple effect" is much larger than the pure distance effect or production cost increase.