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Inequality and Trade

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  • Devashish Mitra
  • Vitor Trindade

Abstract

We incorporate demand-side considerations in trade in a systematic but straightforward way. We do so by focusing on the role of inequality in the determination of trade flows and patterns. With nonhomothetic preferences, when countries are similar in all respects but asset inequality, we find that trade is driven by specialization in consumption, not production. These assumptions allow us to generate some interesting international spillover effects of redistributive policies. We also look at the effects of combining inequality and endowment differences on trade flows, and see that this has implications for the mystery of the missing trade.' We then study a model of monopolistic competition, and find a novel V-shaped relationship between the ratio of inter-industry to intra-industry trade and a country's inequality. Finally, we look at how international differences in factor endowments affect this relationship between the ratio of inter- to- intra-industry trade and inequality. Our theory formalizes as well as modifies Linder's conjecture about the relationship between intraindustry trade and the extent of similarity between trading partners.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10087.

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Date of creation: Nov 2003
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Publication status: published as Mitra, Devashish and Vitor Trindade. "Inequality And Trade," Canadian Journal of Economics, 2005, v38(4,Nov), 1253-1271.
Handle: RePEc:nbr:nberwo:10087

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  1. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  2. Kevin M. Murphy & Andrei Shleifer & Robert Vishny, 1988. "Income Distribution, Market Size, and Industrialization," NBER Working Papers 2709, National Bureau of Economic Research, Inc.
  3. Markusen, James R, 1986. "Explaining the Volume of Trade: An Eclectic Approach," American Economic Review, American Economic Association, American Economic Association, vol. 76(5), pages 1002-11, December.
  4. Kiminori Matsuyama, 2000. "A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(6), pages 1093-1120, December.
  5. Muhammed Dalgin & Vitor Trindade & Devashish Mitra, 2008. "Inequality, Nonhomothetic Preferences, and Trade: A Gravity Approach," Southern Economic Journal, Southern Economic Association, vol. 74(3), pages 747-774, January.
  6. Thursby, Jerry G & Thursby, Marie C, 1987. "Bilateral Trade Flows, the Linder Hypothesis, and Exchange Risk," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 488-95, August.
  7. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, Elsevier, vol. 9(4), pages 469-479, November.
  8. Mani, Anandi, 2001. " Income Distribution and the Demand Constraint," Journal of Economic Growth, Springer, Springer, vol. 6(2), pages 107-33, June.
  9. Francois, Joseph F & Kaplan, Seth, 1996. "Aggregate Demand Shifts, Income Distribution, and the Linder Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 244-50, May.
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