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

Joachim Stibora () and Albert de Vaal ()
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Joachim Stibora: Kingston University London
Albert de Vaal: Radboud University Nijmegen, Postal: , Nijmegen School of Management, Department of Economics, Radboud University Nijmegen, The, Netherlands.,

No 2006-6, Economics Discussion Papers from School of Economics, Kingston University London

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.

Keywords: Ricardian trade model; asymmetric demand complementarities; Customs Union; income distribution (search for similar items in EconPapers)
JEL-codes: F10 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2006-09-14
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:kngedp:2006_006

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