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Trade and growth in an unequal global economy

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  • Andreas Kohler

Abstract

This paper studies the patterns of trade and the incentives to innovate in an unequal global economy. We introduce non-homothetic preferences in a general-equilibrium model of endogenous growth and international trade between two countries, and argue that the effects of market integration on the consequent trade patterns and the incentives to innovate depend on the degree of income inequality across countries. We find that if inequality across countries is low, the extensive margin of trade between countries is high whereas the world growth rate is low. The introduction of non-homothetic preferences rises a number of interesting questions that are not an issue in the standard model. For example, we discuss the design of intellectual property rights, in particular national vs. international exhaustion of patents, and argue that households in poor and rich countries might not see eye to eye depending on how poor households weigh future losses in consumption against present gains. Furthermore, we address the welfare consequences of a trade liberalization, and show that households in the poor country might loose relative to households in the rich country if trade costs fall from a high to a sufficiently low level.

Suggested Citation

  • Andreas Kohler, 2012. "Trade and growth in an unequal global economy," ECON - Working Papers 081, Department of Economics - University of Zurich.
  • Handle: RePEc:zur:econwp:081
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    File URL: http://www.econ.uzh.ch/static/wp/econwp081.pdf
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    References listed on IDEAS

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    1. Reto Foellmi & Josef Zweimuller, 2006. "Income Distribution and Demand-Induced Innovations," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 941-960.
    2. Foellmi, Reto & Hanslin Grossmann, Sandra & Kohler, Andreas, 2018. "A dynamic North-South model of demand-induced product cycles," Journal of International Economics, Elsevier, vol. 110(C), pages 63-86.
    3. Keith E. Maskus & Yongmin Chen, 2004. "Vertical Price Control and Parallel Imports: Theory and Evidence," Review of International Economics, Wiley Blackwell, vol. 12(4), pages 551-570, September.
    4. Ina Simonovska, 2009. "Income Differences and Prices of Tradables," 2009 Meeting Papers 692, Society for Economic Dynamics.
    5. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
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    Cited by:

    1. Claudia Bernasconi, 2013. "Similarity of income distributions and the extensive and intensive margin of bilateral trade flows," ECON - Working Papers 115, Department of Economics - University of Zurich.

    More about this item

    Keywords

    Growth; inequality; international trade;

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • F10 - International Economics - - Trade - - - General

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