|Tarasov, Alexander (April 2010): Trade Liberalization and Welfare Inequality: a Demand-Based Approach. Discussion Papers in Economics 2010-26|
There is strong evidence that different income groups consume di¤erent bundles of goods. This evidence suggests that trade liberalization can a¤ect welfare inequality within a country via changes in the relative prices of goods consumed by di¤erent income groups (the price effect). In this paper, I develop a framework that enables us to explore the role of the price effect in determining welfare inequality. There are two core elements in the model. First, I assume that heterogenous in income consumers share identical but nonhomothetic preferences. Secondly, I consider a monopolistic competition environment that leads to variable markups a¤ected by trade and trade costs. I �nd that trade liberalization does affect the prices of different goods differently and, as a result, can bene�fit some income classes more than others. In particular, I show that the relative welfare of the rich with respect to that of the poor has a hump shape as a function of trade costs.
|Item Type:||Paper (Discussion Paper)|
|Keywords:||nonhomothetic preferences, income distribution, monopolistic competition|
Economics > Discussion Papers in Economics
Economics > Discussion Papers in Economics > Economic Policy
|Subjects:||300 Social sciences > 300 Social sciences, sociology and anthropology|
300 Social sciences > 330 Economics
|Deposited On:||30. Apr 2010 21:37|
|Last Modified:||28. Nov 2013 11:14|
Deaton, A. and Muellbauer, J. (1980), "Economics and Consumer Behavior," Cambridge University Press.
Eaton, J. and Kortum, S. (2002), "Technology, Geography, and Trade," Econometrica, 70, 1741�-1779.
Fajgelbaum, P., Grossman, G. and Helpman, E. (2009), "Income Distribution, Product Quality, and International Trade," mimeo.
Fieler, A. (2009), "Non-Homotheticity and Bilateral Trade: Evidence and a Quantitative Explanation," mimeo.
Flam, H. and Helpman, E. (1987), "Vertical Product Differentiation and North-South Trade," The American Economic Review, 77, 810-822.
Foellmi, R., Hepenstrick, C. and Zweimueller, J. (2007), "Income E¤ects in the Theory of Monopolistic Competition and Trade," mimeo.
Goldberg, P. and Pavcnik, N. (2007), "Distributional E¤ects of Globalization in Developing Countries," Journal of Economic Literature, 45, 39�-82.
Hunter, L. and Markusen, J. (1988), "Per-capita Income as a Determinant of Trade," in R. Feenstra (ed.), Empirical Methods for International Trade, Cambridge: MIT Press, 89-109.
Krugman, P. (1980), "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, 70(5), 950-959.
Markusen, J. (1986), "Explaining the Volume of Trade: An Eclectic Approach," The American Economic Review, 76, 1002-�1011.
Matsuyama, K. (2000), "A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade," Journal of Political Economy, 108, 1093-1120.
Melitz, M. and Ottaviano, G. (2008), "Market Size, Trade, and Productivity," Review of Economic Studies, 75(1), 295-316.
Mitra, D. and Trindade, V. (2005), "Inequality and Trade," Canadian Journal of Economics, 38, 1253-1271.
Murphy, K., Shleifer, A. and Vishny, R. (1989), "Income Distribution, Market Size, and Industrialization," Quarterly Journal of Economics, 104, 537�-64.
Ramezzana, P. (2000), "Per Capita Income, Demand for Variety, and International Trade: Linder Reconsidered", CEP Discussion Paper DP0460.
Stibora, J. and Vaal, A. (2005), "Trade Policy in a Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences," Journal of Development Economics, 84, 350-377.
Stokey, N. (1991), "The Volume and Composition of Trade between Rich and Poor Countries," Review of Economic Studies, 58, 63-80.
Tarasov, A. (2009), "Income Distribution, Market Structure, and Individual Welfare," The B.E. Journal of Theoretical Economics (Contributions), 9(1), Article 39.