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Technical progress in North and welfare gains in South under nonhomothetic preferences

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Lilas Demmou
Abstract

The paper proposes a theoretical model investigating the welfare consequences of technological shocks in a Ricardian framework (a la Dornbush, Fisher and Samuelson, 1977). Contrary to existing literature, the model incorporates a nonhomothetic demand function whose price and income elasticities are endogenously determined by technology. The model is applied to the case of trade between two economies with different development levels. It is shown in particular that the developing country can experience a fall in utility as a result of technical progress in the developed country. This result depends on the type of technological shock assumed (biased vs uniform technical progress), as well as on the size of the development gap.

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Paper provided by PSE (Ecole normale supérieure) in its series PSE Working Papers with number 2007-08.

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Date of creation: 2007
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Handle: RePEc:pse:psecon:2007-08

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