<p>There is <em>some</em> evidence for homothetic preference amongst large number of countries, although there are for sure bound to be cases that violate this assumption.</p>
<p>For example, <a href="https://www.journals.uchicago.edu/doi/abs/10.1086/421168" rel="nofollow noreferrer">Choi &amp; Krishna (2004),</a> show indirect empirical evidence for this. As the authors report (my comments in [])</p>
<blockquote>
<p>The restrictions [including homothetic preferences] implied by the theory for
overall (i.e., bidirectional) bilateral trade flows are satisfied for the vast
majority of country pairs in our sample. Having said this, we must note
that in many cases, the theory is only “just” satisfied. Nevertheless, this
finding stands in strong contrast with many previous tests of the theory
that were conducted under the restrictive assumptions of identical factor
prices and identical homothetic preferences</p>
</blockquote>
<p>The authors do this by seeing if the estimations from unrestricted models are in line with what the models with the restrictions would predict. Since they dont find much significant differences it stands to reason that this implies the restrictions are valid.</p>

CC BY-SA 4.0
2022-02-03T20:53:48.970Z
(+1) for being measured and using *some* (:
Giskard
CC BY-SA 4.0
2022-02-03T20:51:33.433Z
2022-02-03T20:53:33.837Z
2022-02-03T20:53:33.837Z
1muflon1
<p>In international trade class, we assume homothetic preferences for every country, and each country has an endowment. Why do we assume homothetic preferences? Is this because we see (from data) that relative price changes are what drive trade patterns, and not income, or are there other reasons?</p>
<p>(This is half of <a href="https://economics.stackexchange.com/questions/50291/net-and-gross-market-clearing-in-endowment-economy">a post</a> that I split into two separate questions.)</p>

CC BY-SA 4.0
2022-02-04T09:19:18.330Z
This might be a relevant [link](https://blogs.exeter.ac.uk/insted/2016/04/30/non-homothetic-preferences-in-models-of-international-trade/). **In my opinion**, the author in the blog is correct: the assumption of homothetic preferences allows the analysis to focus only on the supply side.
tdm
<microeconomics><international-trade><preferences><international-economics>
Homothetic preferences for international trade
Giskard
# Homothetic preferences for international trade

(Asked by: username_0 on 2022-02-03)

In international trade class, we assume homothetic preferences for every country, and each country has an endowment. Why do we assume homothetic preferences? Is this because we see (from data) that relative price changes are what drive trade patterns, and not income, or are there other reasons?

(This is half of [a post](https://economics.stackexchange.com/questions/50291/net-and-gross-market-clearing-in-endowment-economy) that I split into two separate questions.)

**Tags:** microeconomics, international-trade, preferences, international-economics

> **Comments:**
> **username_1**: This might be a relevant [link](https://blogs.exeter.ac.uk/insted/2016/04/30/non-homothetic-preferences-in-models-of-international-trade/). **In my opinion**, the author in the blog is correct: the assumption of homothetic preferences allows the analysis to focus only on the supply side.  

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## 1 answers

### Answer by username_2 on 2022-02-03. Score: 3

There is *some* evidence for homothetic preference amongst large number of countries, although there are for sure bound to be cases that violate this assumption.

For example, [Choi & Krishna (2004),](https://www.journals.uchicago.edu/doi/abs/10.1086/421168) show indirect empirical evidence for this. As the authors report (my comments in [])

> The restrictions [including homothetic preferences] implied by the theory for
> overall (i.e., bidirectional) bilateral trade flows are satisfied for the vast
> majority of country pairs in our sample. Having said this, we must note
> that in many cases, the theory is only “just” satisfied. Nevertheless, this
> finding stands in strong contrast with many previous tests of the theory
> that were conducted under the restrictive assumptions of identical factor
> prices and identical homothetic preferences

The authors do this by seeing if the estimations from unrestricted models are in line with what the models with the restrictions would predict. Since they dont find much significant differences it stands to reason that this implies the restrictions are valid.

> **Comments:**
> **username_0**: (+1) for being measured and using *some* (:  

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