International trade and “Catching up with the Joneses”: Are the consumption patterns convergent?

Iader Giraldo and Fernando Jaramillo ()

Research in Economics, 2020, vol. 74, issue 3, 233-249

Abstract: We use a dynamic international trade model to analyse the implications of international trade for agents’ preferences and economic growth. This model is based on the home market effect with external habit formation (“catching up with the Joneses”) and “learning by doing” in production. We demonstrate the following: the historical composition of consumption in countries determines industrialization after trade; the preferences of agents converge after trade, independent of the economic results; and the welfare effects of trade may be positive or negative depending on trading partner characteristics. In some scenarios, autarky is strictly preferred to trade. Thus, international trade does not necessarily imply greater welfare, as is the typical result in a static context under CES preferences.

Keywords: International Trade; Economic Growth; Home Market Effect; Habit Formation; Preferences (search for similar items in EconPapers)
JEL-codes: F12 F43 O33 O41 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:74:y:2020:i:3:p:233-249

DOI: 10.1016/j.rie.2020.07.004

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