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On the Distributional Effects of Trade Policy: A Macroeconomic Perspective

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Author Info
Luis San Vicente Portes () (Economics Georgetown University)
Abstract

This paper develops a theoretical model to explore the relationship between openness to trade and long-term income inequality. Empirical evidence on the issue is mixed, though greater inequality is often cited as a possible cost of trade liberalization. To quantify the effect of liberalization on inequality I calibrate a two-sector (agriculture and non-agriculture) open-economy macroeconomic model to the Mexican economy. Agents in the model are subject to idiosyncratic, uninsurable labor income risk, and precautionary saving generates endogenous distributions of wealth and income. When preferences are characterized by subsistence floor for food consumption, trade liberalization implies large welfare gains for low wealth agents. At the same time, liberalization increases long-run wealth and income inequality. After liberalization land-owners are worse off since the price of land falls along with the relative price of the agricultural commodity. When tariff revenue must be replaced by an alternative instrument, higher labor taxes are preferred to higher taxes on consumption or capital

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 358.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:358

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Keywords: Free trade; inequality; agriculture;

Find related papers by JEL classification:
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
O13 - Economic Development, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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