Trade Liberalization and Welfare Inequality: a Demand-Based Approach

Alexander Tarasov

Discussion Papers in Economics from University of Munich, Department of Economics

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.

Keywords: nonhomothetic preferences; income distribution; monopolistic competition (search for similar items in EconPapers)
JEL-codes: F12 (search for similar items in EconPapers)
Date: 2010-04
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https://epub.ub.uni-muenchen.de/11492/1/Tarasov_Welfare_Inequality.pdf (application/pdf)

Related works:
Journal Article: Trade Liberalization and Welfare Inequality: A Demand-Based Approach (2012)
Working Paper: Trade Liberalization and Welfare Inequality: A Demand-Based Approach (2012)
Working Paper: Trade Liberalization and Welfare Inequality: a Demand-Based Approach (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenec:11492

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