Trade Liberalization and Welfare Inequality: a Demand-Based Approach

Tarasov, Alexander (April 2010): Trade Liberalization and Welfare Inequality: a Demand-Based Approach. Münchener Wirtschaftswissenschaftliche Beiträge (VWL) 2010-26

Abstract

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.

• Dokumententyp: Paper
• Publikationsform: Preprint
• Keywords: nonhomothetic preferences, income distribution, monopolistic competition
• Fakultät: Volkswirtschaft ; Volkswirtschaft > Munich Discussion Papers in Economics ; Volkswirtschaft > Munich Discussion Papers in Economics > Wirtschaftspolitik
• Themengebiete: 300 Sozialwissenschaften > 300 Sozialwissenschaft, Soziologie ; 300 Sozialwissenschaften > 330 Wirtschaft
• JEL Classification: F12
• Sprache: Englisch

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