Is the "Houthakker-Magee" Finding Durable? Evidence from Disaggregated Trade Flows between China and Korea

Using income growth to explain trade flows has a long history in international trade. This paper examines the income elasticities for the categories of goods to be consistent with the theoretical implications, using the trade flows between China and Korea over the sample period of 1991-2008. The new trade theory implies that the inclusion of new variety terms reduces the magnitude of income elasticities, disaggregation of trade flows yields different magnitudes of income elasticity, and income elasticity of differentiated goods is higher than that of homogeneous goods. The empirical findings are consistent with the implication from the new trade theory. However, the asymmetry in income elasticity (Houthakker-Magee finding) is quite durable. This paper enhances the consistency between the theories and evidence.