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Unequal societies, Unequal Terms of Trade and Trade Policy

Author

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  • Martine Carré

    (LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique)

  • Alessandro Riboni

    (LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique)

Abstract

We consider a demand based theory along the lines of Murphy et al. (1989) to study the interaction between income inequalities and trade patterns. We analyze the effect of redistributive policies on the production patterns and welfare. We distinguish an intensive and an extensive channels through which an increase of demand - driven by redistribution or trade opening - leads to output growth inside a country and in its partner country. Trade between dierent countries (in terms of income or inequality) generates a modication of the demand distribution between sectors which impacts the industrialization process, the terms of trade and the welfare distribution within countries. Our framework hopefully provides a basic tool for studying the interactions between changes in taris on welfare and inequalities inside and between countries. We obtain non monotone relationships between the degree of inequality in the home country and the level of income of its trade partner. We can observe a U-shape or an inverted U-shape depending on, among other things, the relative size of the two countries. As a result the welfare eect of trading with unequal countries is ambiguous.

Suggested Citation

  • Martine Carré & Alessandro Riboni, 2012. "Unequal societies, Unequal Terms of Trade and Trade Policy," Post-Print hal-01515866, HAL.
  • Handle: RePEc:hal:journl:hal-01515866
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01515866
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    References listed on IDEAS

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    1. Devashish Mitra & Vitor Trindade, 2005. "Inequality and trade," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1253-1271, November.
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    3. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 43-61.
    4. Kiminori Matsuyama, 2000. "A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1093-1120, December.
    5. Francois, Joseph F & Kaplan, Seth, 1996. "Aggregate Demand Shifts, Income Distribution, and the Linder Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 244-250, May.
    6. Markusen, James R, 1986. "Explaining the Volume of Trade: An Eclectic Approach," American Economic Review, American Economic Association, vol. 76(5), pages 1002-1011, December.
    7. Marcelo, Fukushima, 2008. "Non-Homothetic Preferences and Labor Heterogeneity: The Effects of Income Inequality on Trade Patterns," MPRA Paper 13385, University Library of Munich, Germany.
    8. Spiros Bougheas & Raymond Riezman, 2013. "Trade and the distribution of human capital," World Scientific Book Chapters,in: International Trade Agreements and Political Economy, chapter 20, pages 395-407 World Scientific Publishing Co. Pte. Ltd..
    9. Kevin M. Murphy & Andrei Shleifer & Robert Vishny, 1989. "Income Distribution, Market Size, and Industrialization," The Quarterly Journal of Economics, Oxford University Press, vol. 104(3), pages 537-564.
    10. Foellmi, Reto & Oechslin, Manuel, 2010. "Market imperfections, wealth inequality, and the distribution of trade gains," Journal of International Economics, Elsevier, vol. 81(1), pages 15-25, May.
    11. Foellmi, Reto & Oechslin, Manuel, 2010. "Market imperfections, wealth inequality, and the distribution of trade gains," Journal of International Economics, Elsevier, vol. 81(1), pages 15-25, May.
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    Keywords

    Output growth; public policies; welfare; trade; income;

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