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Trade Liberalization and Welfare Inequality: A Demand-Based Approach

  • Alexander Tarasov

There is strong evidence suggesting that different income groups consume different bundles of goods. Hence, trade liberalization can affect welfare inequality via changes in the relative prices of goods consumed by different income groups (the price effect). In this paper, I develop a framework that enables us to explore the role of the price effect in determining welfare inequality. I find that trade liberalization does benefit some income classes more than others. In particular, I show that the relative welfare of the rich with respect to that of the poor has a hump shape as a function of trade costs.

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File URL: http://hdl.handle.net/10.1111/j.1467-9442.2012.01724.x
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Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 114 (2012)
Issue (Month): 4 (December)
Pages: 1296-1317

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Handle: RePEc:bla:scandj:v:114:y:2012:i:4:p:1296-1317
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  1. Marc J. Melitz & Gianmarco I.P. Ottaviano, 2005. "Market Size, Trade, and Productivity," NBER Working Papers 11393, National Bureau of Economic Research, Inc.
  2. Pinelopi Koujianou Goldberg & Nina Pavcnik, 2007. "Distributional Effects of Globalization in Developing Countries," NBER Working Papers 12885, National Bureau of Economic Research, Inc.
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  4. Tarasov, Alexander, 2009. "Income distribution, market structure, and individual welfare," Munich Reprints in Economics 19578, University of Munich, Department of Economics.
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  8. Devashish Mitra & Vitor Trindade, 2003. "Inequality and Trade," NBER Working Papers 10087, National Bureau of Economic Research, Inc.
  9. Flam, Harry & Helpman, Elhanan, 1987. "Vertical Product Differentiation and North-South Trade," American Economic Review, American Economic Association, vol. 77(5), pages 810-22, December.
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  11. Nancy L. Stokey, 1991. "The Volume and Composition of Trade Between Rich and Poor Countries," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 63-80.
  12. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, November.
  13. Stibora, Joachim & de Vaal, Albert, 2007. "Trade policy in a Ricardian model with a continuum of goods under nonhomothetic preferences," Journal of Development Economics, Elsevier, vol. 84(1), pages 350-377, September.
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