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Trade Liberalization and Welfare Inequality: A Demand-Based Approach

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  • Alexander Tarasov
Abstract
There is strong evidence that different income groups consume di¤erent bundles of goods. This evidence suggests that trade liberalization can a¤ect welfare inequality within a country via changes in the relative prices of goods consumed by di¤erent income groups (the price effect). In this paper, I develop a framework that enables us to explore the role of the price effect in determining welfare inequality. There are two core elements in the model. First, I assume that heterogenous in income consumers share identical but nonhomothetic preferences. Secondly, I consider a monopolistic competition environment that leads to variable markups a¤ected by trade and trade costs. I �nd that trade liberalization does affect the prices of different goods differently and, as a result, can bene�fit some income classes more than others. In particular, I show that the relative welfare of the rich with respect to that of the poor has a hump shape as a function of trade costs.
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  • Alexander Tarasov, 2012. "Trade Liberalization and Welfare Inequality: A Demand-Based Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(4), pages 1296-1317, December.
    • Handle: RePEc:bla:scandj:v:114:y:2012:i:4:p:1296-1317
    DOI: j.1467-9442.2012.01724.x
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    1. Devashish Mitra & Vitor Trindade, 2005. "Inequality and trade," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 38(4), pages 1253-1271, November.
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    Cited by:

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    2. Christian Hepenstrick & Alexander Tarasov, 2015. "Per capita income and the extensive margin of bilateral trade," Canadian Journal of Economics, Canadian Economics Association, vol. 48(4), pages 1561-1599, November.
    3. P. M. Picard & A. Tampieri, 2021. "Vertical differentiation and trade among symmetric countries," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1319-1355, June.
    4. McCalman, Phillip, 2018. "International trade, income distribution and welfare," Journal of International Economics, Elsevier, vol. 110(C), pages 1-15.
    5. Jaimovich, Esteban & Merella, Vincenzo, 2015. "Love for quality, comparative advantage, and trade," Journal of International Economics, Elsevier, vol. 97(2), pages 376-391.
    6. Hartmut Egger & Simone Habermeyer, 2022. "How preferences shape the welfare and employment effects of trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 158(3), pages 815-853, August.
    7. Hartmut Egger & Simone Habermeyer, 2020. "How Preferences Shape the Welfare and Employment Effects of Trade," Working Papers 188, Bavarian Graduate Program in Economics (BGPE).

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    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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