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Equity and International Trade

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Abstract

We develop a generalized approach to the treatment of household inequality aspects of social welfare in general equilibrium models of trade. We follow a dual approach, highlighting how general equilibrium distributional aspects of social welfare related to import protection may be examined alongside corresponding eciency aspects. We work with a social welfare function that is explicitly separable between mean income and income dispersion. Our results compliment the set of standard inequality results in trade theory that are focused strictly on functional rather than household inequality. As an application of the theoretical framework, we then examine the direct impact of inequality on a government's objective function. We nd that equity consider- ations may serve to counter lobbying interests in both capital-rich and capital-poor countries, though with an opposite marginal impact on the nal policy outcome. We also identify a new theoretical basis for potential protectionist bias on the part of welfare maximizing governments in capital-rich countries in the Heckscher-Ohlin model. Our dual framework also o ers a possible empirical framework for decomposition of policy-induced price changes into household inequality for a broad class of models.

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Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2008-14.

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Length: 31 pages
Date of creation: Sep 2008
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Handle: RePEc:jku:econwp:2008_14

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Keywords: Sen welfare functions; duality; political economy of equity;

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