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Trade, Inequality and Distribution-neutral Fiscal Policy

Author

Listed:
  • Sugata Marjit
  • Suryaprakash Mishra
  • Sandip Sarkar
  • Lei Yang

Abstract

Gains from trade and inequality do not feature prominently in trade theory. The standard criterion of Pareto efficiency indicates nothing about inequality when applied to the redistribution of gains from trade. Yet, trade-induced inequality has become a talking point and extremely contentious issue worldwide. In a Heckscher–Ohlin–Samuelson (HOS) model of trade, we consider tax-transfer policies that do not decrease the absolute income of any group, as suggested by the standard Pareto rule and keep the pre-trade degree of inequality between skilled and unskilled workers unchanged. Such a fiscal policy exists and is independent of whether the tax is progressive or proportional. We show that the aggregate gain in real income due to trade can be distributed to make everyone better off without increasing inequality. A generalization of the basic result shows that any Pareto efficient allocation can be transformed into a distribution-neutral allocation through appropriate fiscal policy. JEL Codes: F11, J31, D63, H20, H23

Suggested Citation

  • Sugata Marjit & Suryaprakash Mishra & Sandip Sarkar & Lei Yang, 2019. "Trade, Inequality and Distribution-neutral Fiscal Policy," Foreign Trade Review, , vol. 54(2), pages 61-74, May.
    • Handle: RePEc:sae:fortra:v:54:y:2019:i:2:p:61-74
    DOI: 10.1177/0015732519831797
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    References listed on IDEAS

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    Cited by:

    1. Sugata Marjit & Anjan Mukherji & Sandip Sarkar, 2018. "Pareto Efficiency, Inequality and Distribution Neutral Fiscal Policy - An Overview," Discussion Papers Series 590, School of Economics, University of Queensland, Australia.
    2. Priya Brata Dutta & Nirjhar Ghosh, 2021. "Wage Inequality and Unemployment in the Presence of Imported Intermediate Goods: A Theoretical Analysis," Foreign Trade Review, , vol. 56(4), pages 375-399, November.
    3. Moses K. Tule & Taiwo Ajilore & Augustine Ujunwa, 2019. "Monetary Policy Contagion in the West African Monetary Zone," Foreign Trade Review, , vol. 54(4), pages 375-398, November.

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    More about this item

    Keywords

    Trade model; inequality; Pareto efficiency; distribution-neutral fiscal policy;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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