The North-South trade literature has traditionally explored conditions under which international trade might further magnify income disparities between the advanced North and the backward South. We show that even when no single country is initially more advanced than any other one and productivity changes are uniform and identical in all countries, trade may still be a source of income divergence when nonhomothetic preferences and quality ladders are jointly taken into account. Income divergence will be experienced when comparative advantages induce patterns of specialisation that, although initially optimal for all countries, do not offer the same scope for quality upgrading of final products. (JEL: F11, F43, O40)

We propose a Ricardian trade model with horizontal and vertical di¤erentiation, where willingness to pay for quality rises with individuals'incomes, and productivity di¤erentials across countries are stronger for high-quality varieties of goods. Our theory predicts that the scope for trade widens and international specialisation intensi…es as incomes grow and wealthier consumers raise the quality of their consumption baskets. This implies that comparative advantages strengthen gradually over the path of development as a by-product of the process of quality upgrading. The evolution of comparative advantages leads to speci…c trade patterns that change over the growth path, by linking richer importers to more specialised exporters.We provide empirical support for this prediction, showing that the share of imports originating from exporters exhibiting a comparative advantage in a speci…c product correlates positively with the importer's GDP per head.

Using average import prices (unit values) as proxies for quality, a large body of the international trade literature finds both theoretical and empirical support for the positive relationship between importer income and quality of imports. Several authors, however, argue that the empirical evidence of the link between income and product quality might be spurious, since import prices could be affected by other factors than product quality. This paper takes into account this issue with a new theoretical and empirical approach. Building on Khandelwal’s (2010) discrete choice model approach, where quality is inferred by quantitative market shares as well as unit values, we develop a model that allows for willingness to pay for quality to vary with income. We empirically validate the theoretical relationship between importer income and product quality by using the Eurostat’s COMEXT database, which collects customs data reported by EU countries at 8-digit disaggregation. Our estimations support the positive link between consumer income and product quality, which is also robust across sectors

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