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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
13385.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Devashish Mitra & Vitor Trindade, 2005.
"Inequality and trade,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 38(4), pages 1253-1271, November.
[Downloadable!] (restricted)
Other versions:
Devashish Mitra & Vitor Trindade, 2003.
"Inequality and Trade,"
NBER Working Papers
10087, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)