Non-Homothetic Preferences and Labor Heterogeneity: The Effects of Income Inequality on Trade Patterns
AbstractThis 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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 13385.
Date of creation: May 2008
Date of revision:
Income inequality; monopolistic competition; non-homothetic preferences; labor heterogeneity;
Find related papers by JEL classification:
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
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