Measuring Quality in International Trade

Product quality plays a vital role in international trade flows, but the measurement of quality remains 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