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Unequal societies, Unequal Terms of Trade and Trade Policy

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  • Carré, Martine
  • Riboni, Alessandro

Abstract

We consider a demand based theory along the lines of Murphy et al. (1989) to study the interaction between income inequalities and trade patterns. We analyze the effect of redistributive policies on the production patterns and welfare. We distinguish an intensive and an extensive channels through which an increase of demand - driven by redistribution or trade opening - leads to output growth inside a country and in its partner country. Trade between dierent countries (in terms of income or inequality) generates a modication of the demand distribution between sectors which impacts the industrialization process, the terms of trade and the welfare distribution within countries. Our framework hopefully provides a basic tool for studying the interactions between changes in taris on welfare and inequalities inside and between countries. We obtain non monotone relationships between the degree of inequality in the home country and the level of income of its trade partner. We can observe a U-shape or an inverted U-shape depending on, among other things, the relative size of the two countries. As a result the welfare eect of trading with unequal countries is ambiguous.

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Paper provided by Université Paris-Dauphine in its series Open Access publications from Université Paris-Dauphine with number urn:hdl:123456789/10331.

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Handle: RePEc:ner:dauphi:urn:hdl:123456789/10331

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Related research

Keywords: Output growth; public policies; welfare; trade; income;

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References

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  1. Devashish Mitra & Vitor Trindade, 2003. "Inequality and Trade," NBER Working Papers 10087, National Bureau of Economic Research, Inc.
  2. Marcelo, Fukushima, 2008. "Non-Homothetic Preferences and Labor Heterogeneity: The Effects of Income Inequality on Trade Patterns," MPRA Paper 13385, University Library of Munich, Germany.
  3. Bougheas, Spiros & Riezman, Raymond, 2007. "Trade and the distribution of human capital," Journal of International Economics, Elsevier, vol. 73(2), pages 421-433, November.
  4. Reto Foellmi & Manuel Oechslin, 2010. "Market Imperfections, Wealth Inequality, and the Distribution of Trade Gains," Diskussionsschriften dp1006, Universitaet Bern, Departement Volkswirtschaft.
  5. Yeaple, Stephen Ross, 2005. "A simple model of firm heterogeneity, international trade, and wages," Journal of International Economics, Elsevier, vol. 65(1), pages 1-20, January.
  6. Pablo D. Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2009. "Income Distribution, Product Quality, and International Trade," NBER Working Papers 15329, National Bureau of Economic Research, Inc.
  7. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," NBER Working Papers 3099, National Bureau of Economic Research, Inc.
  8. Yo Chul Choi & David Hummels & Chong Xiang, 2006. "Explaining Import Variety and Quality: The Role of the Income Distribution," NBER Working Papers 12531, National Bureau of Economic Research, Inc.
  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.
  10. Markusen, James R, 1986. "Explaining the Volume of Trade: An Eclectic Approach," American Economic Review, American Economic Association, vol. 76(5), pages 1002-11, December.
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