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Trade and growth in an unequal global economy

  • Andreas Kohler
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    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.

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    File URL: http://www.econ.uzh.ch/static/wp/econwp081.pdf
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    Paper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 081.

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    Date of creation: Jun 2012
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    Handle: RePEc:zur:econwp:081
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    1. Ina Simonovska, 2011. "Income Differences and Prices of Tradables," Working Papers 1015, University of California, Davis, Department of Economics.
    2. Föllmi, Reto & Hanslin, Sandra & Kohler, Andreas, 2012. "A Dynamic North-South Model of Demand-Induced Product Cycles," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62023, Verein für Socialpolitik / German Economic Association.
    3. Reto Foellmi & Josef Zweimüller, . "Income Distribution and Demand-induced Innovations," IEW - Working Papers 212, Institute for Empirical Research in Economics - University of Zurich.
    4. Maskus, Keith E. & Yongmin Chen, 2000. "Vertical price control and parallel imports - theory and evidence," Policy Research Working Paper Series 2461, The World Bank.
    5. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
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