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Non-Homothetic Preferences and Labor Heterogeneity: The Effects of Income Inequality on Trade Patterns

Author

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  • Marcelo, Fukushima

Abstract

This paper builds a two-country-two-sector trade model with a monopolistically competitive sector and non-homothetic preferences. It assumes the existence of two types of goods: necessities (which are homogeneous) and luxuries (which are differentiated) and heterogeneous labor. The implications of income inequality on trade patterns are examined. It also considers the effects of redistributive policies on the production structure and welfare of countries and concludes that: First, in autarky, the more unequal country produces a larger number of varieties; Second, the opening to trade will unambiguously increase the number of varieties consumed by any country, and hence, welfare; Third, the more equal country benefits more from trade liberalization. Fourth, a redistributive policy may harm some consumers not only by diminishing disposable income, but also by diminishing the number of varieties produced.

Suggested Citation

  • 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.
  • Handle: RePEc:pra:mprapa:13385
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    File URL: https://mpra.ub.uni-muenchen.de/13385/1/MPRA_paper_13385.pdf
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    References listed on IDEAS

    as
    1. Devashish Mitra & Vitor Trindade, 2005. "Inequality and trade," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1253-1271, November.
    2. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    3. Toru Kikuchi & Koji Shimomura & Dao-Zhi Zeng, 2006. "On the Emergence of Intra-industry Trade," Journal of Economics, Springer, vol. 87(1), pages 15-28, January.
    4. 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.
    5. 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..
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Martine Carré & Alessandro Riboni, 2012. "Unequal societies, Unequal Terms of Trade and Trade Policy," Post-Print hal-01515866, HAL.
    2. repec:dau:papers:123456789/10331 is not listed on IDEAS

    More about this item

    Keywords

    Income inequality; monopolistic competition; non-homothetic preferences; labor heterogeneity;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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