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Non-Homothetic Preferences and Labor Heterogeneity: The Effects of Income Inequality on Trade Patterns

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  • Marcelo, Fukushima

Abstract

This paper builds a two-country-two-sector trade model with a monopolistically competitive sector and non-homothetic preferences. It assumes the existence of two types of goods: necessities (which are homogeneous) and luxuries (which are differentiated) and heterogeneous labor. The implications of income inequality on trade patterns are examined. It also considers the effects of redistributive policies on the production structure and welfare of countries and concludes that: First, in autarky, the more unequal country produces a larger number of varieties; Second, the opening to trade will unambiguously increase the number of varieties consumed by any country, and hence, welfare; Third, the more equal country benefits more from trade liberalization. Fourth, a redistributive policy may harm some consumers not only by diminishing disposable income, but also by diminishing the number of varieties produced.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13385.

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Date of creation: May 2008
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Handle: RePEc:pra:mprapa:13385

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Keywords: Income inequality; monopolistic competition; non-homothetic preferences; labor heterogeneity;

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References

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  1. Bougheas, Spiros & Riezman, Raymond, 2007. "Trade and the distribution of human capital," Journal of International Economics, Elsevier, Elsevier, vol. 73(2), pages 421-433, November.
  2. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 64, University of Warwick, Department of Economics.
  3. Devashish Mitra & Vitor Trindade, 2005. "Inequality and trade," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 38(4), pages 1253-1271, November.
  4. Toru Kikuchi & Koji Shimomura & Dao-Zhi Zeng, 2006. "On the Emergence of Intra-industry Trade," Journal of Economics, Springer, Springer, vol. 87(1), pages 15-28, 01.
  5. 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.
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Cited by:
  1. Carré, Martine & Riboni, Alessandro, 2012. "Unequal societies, Unequal Terms of Trade and Trade Policy," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/10331, Paris Dauphine University.

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