Measuring quality in international trade

Product quality plays a vital role in international trade flows, but the measurement of quality remains to be a challenge because true quality is usually unobserved in trade data. In this study, we propose a straightforward measurement of quality-the weighted-income index-and compare it with the unit-value proxy in a microeconomic model with quality choice. Then we compare the two measurements in the automobile industry. The empirical result shows that the weighted-income quality index performs better than the unit-value quality proxy in ranking true quality.

Research highlights► A new quality measurement using importing countries' weighted income was proposed. ► The weighted-income quality index was compared against unit value analytically. ► Performance of the two measurements were indistinguishable analytically. ► Comparing the two quality indices in their ranking of true auto quality. ► The proposed quality measurement outperformed the unit value.