Income Distribution, Welfare, and the Patterns of Trade

Reto Foellmi, Björn Hartmann and Josef Zweimüller

No 12107, CESifo Working Paper Series from CESifo

Abstract: We develop a two-country model of international trade featuring non-homothetic preferences and income inequality, generating a price schedule where cheap necessities coexist with expensive luxury goods. A central mechanism driving price differences is firm's ability to shift fixed costs between countries, shaping trade patterns and welfare. In a North-South setting, poor consumers in the rich country are most negatively affected by this fixed cost shifting, leading to a Manhattan effect. Following mean-preserving redistribution, import volumes rise in the unequal country, and fall in the more equal one.

Keywords: trade; income inequality; nonhomothetic preferences; pricing-to-market (search for similar items in EconPapers)
JEL-codes: F12 F60 L11 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12107

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