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Trade Liberalization and Welfare Inequality: a Demand-Based Approach

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  • Tarasov, Alexander

Abstract

There is strong evidence that different income groups consume di¤erent bundles of goods. This evidence suggests that trade liberalization can a¤ect welfare inequality within a country via changes in the relative prices of goods consumed by di¤erent 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. There are two core elements in the model. First, I assume that heterogenous in income consumers share identical but nonhomothetic preferences. Secondly, I consider a monopolistic competition environment that leads to variable markups a¤ected by trade and trade costs. I �nd that trade liberalization does affect the prices of different goods differently and, as a result, can bene�fit 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.

Suggested Citation

  • Tarasov, Alexander, 2010. "Trade Liberalization and Welfare Inequality: a Demand-Based Approach," Discussion Papers in Economics 11492, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenec:11492
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    References listed on IDEAS

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    Cited by:

    1. Jaimovich, Esteban & Merella, Vincenzo, 2015. "Love for quality, comparative advantage, and trade," Journal of International Economics, Elsevier, vol. 97(2), pages 376-391.

    More about this item

    Keywords

    nonhomothetic preferences; income distribution; monopolistic competition;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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