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A Ricardian Model with a Continuum of Goods under Non-homothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade

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  • Kiminori Matsuyama

Abstract

This paper develops a Ricardian model with a continuum of goods when consumers have nonhomothetic preferences. Goods are indexed in terms of priority, and the households add higher-indexed goods to their consumption baskets, as they become richer. South (North) has comparative advantage in a lower (higher) spectrum of goods, hence specializing in goods with lower (higher) income elasticities of demand. Due to the income elasticity difference, a variety of exogenous changes have asymmetric effects on the terms of trade, patters of specialization, and welfare. Product cycles, accompanied by a southern terms of trade deterioration, occurs as a consequence of a faster population growth in South, a uniform productivity growth in South, as well as a global productivity improvements. South's domestic policy to redistribute income from the rich to the poor can improve its terms of trade so much that all the households in South may be better off, at the expense of North. Keywords: The Ricardian model, The Dornbusch-Fischer-Samuelson Model, The Flam-Helpman-Stokey Models, Technology and Trade, Population Growth and Trade, North-South Trade, Product Cycle, Nonhomothetic Preferences, Demand Complementarities, Immiserizing Growth, Transfer Paradox.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1241.

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Date of creation: Mar 1999
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Handle: RePEc:nwu:cmsems:1241

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  1. Grossman, Gene M. & Helpman, Elhanan, 1995. "Technology and trade," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 25, pages 1279-1337 Elsevier.
  2. R. Dornbusch & S. Fischer & P. A. Samuelson, 1976. "Comparative Advantage, Trade and Payments in a Ricardian Model With a Continuum of Goods," Working papers 178, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Flam, Harry & Helpman, Elhanan, 1987. "Vertical Product Differentiation and North-South Trade," American Economic Review, American Economic Association, vol. 77(5), pages 810-22, December.
  4. Bhagwati, Jagdish N & Brecher, Richard A & Hatta, Tatsuo, 1983. "The Generalized Theory of Transfers and Welfare: Bilateral Transfers in a Multilateral World," American Economic Review, American Economic Association, vol. 73(4), pages 606-18, September.
  5. Krugman, Paul, 1987. "The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher : Notes on trade in the presence of dynamic scale economies," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 41-55, October.
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