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Does preferential trade benefit poor countries? A general equilibrium assessment with nonhomothetic preferences

Author

Listed:
  • Joachim Stibora

    (Kingston University London)

  • Albert de Vaal

    (Radboud University Nijmegen)

Abstract

We study the effects of preferential trade agreements (PTA) in a model where income matters for consumption patterns. We develop a three-country Ricardian trade model in which goods are ranked according to priority and where economies differ in their income level. The poorest (richest) country has a comparative advantage in the production of lowest-ranked (highest-ranked) goods, specializing in goods with low (high) income elasticities in demand. The medium rich country specializes in the production of the intermediate-ranked commodities. We find that being a nonmember of PTA leads to a terms of trade deterioration for a poor country, and a terms of trade improvement for the high-income country. Becoming a member of a PTA also does not guarantee welfare gains for the low income country, unless it is so poor that it cannot import the higher-ranked goods that the rich country produces.

Suggested Citation

  • Joachim Stibora & Albert de Vaal, 2006. "Does preferential trade benefit poor countries? A general equilibrium assessment with nonhomothetic preferences," Economics Discussion Papers 2006-6, School of Economics, Kingston University London.
    • Handle: RePEc:ris:kngedp:2006_006
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    References listed on IDEAS

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    Cited by:

    1. Joachim Stibora & Albert de Vaal, 2006. "Hub and spoke bilateralism and the global income distribution," Economics Discussion Papers 2006-7, School of Economics, Kingston University London.
    2. Lilas Demmou, 2007. "Technical progress in North and welfare gains in South under nonhomothetic preferences," PSE Working Papers halshs-00588310, HAL.

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    • F10 - International Economics - - Trade - - - General

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