Income Distribution, Poverty Measures and Trade Shocks: A Computable General Equilibrium Model of a Archetype Developing Country

In this paper we use a computable general equilibrium model to study the impact of a trade shock and a tariff reform on household poverty for an archetype developing country. Unlike other studies, we present the income distribution of each household group as a Beta statistical distribution. Also, the income distributions are endogenous in this model. Following a change in the mean income, the income distribution will shift proportionally by the same variation. In contrast of other study, this paper presents the poverty lines as being endogenous. With this specification, the poverty line will change following a variation in relative prices. With the new distributions and poverty line, the poverty levels of the base year are compared with the ex-post values. The Foster, Greer and Thorbecke's (1984) Pa class measures are used to quantify the households' poverty levels. We consider two scenarios. The first is a 30% fall in the world price of the country's export crop and the second is a reduction of 50% in the country's import tariffs. For the fall in the world price of the country's export crop, results indicate a drop in all household incomes and a decrease in the poverty line. A unilateral trade liberalization also has negative consequences on all household incomes. As in the first simulation, the poverty line decreases with a unilateral trade liberalization. The effect of the poverty line is non-negligible in both simulations. In the trade liberalization simulation, the poverty line effect counters the income effect in most cases (Pa. improves). In the other simulation, the poverty line effect attenuates the decrease in the poverty measures.