Trade Liberalization and Welfare Inequality: a Demand-Based Approach

Alexander Tarasov

MPRA Paper from University Library of Munich, Germany

Abstract: There is strong evidence that different income groups consume different bundles of goods. This evidence suggests that trade liberalization can affect welfare inequality within a country via changes in the relative prices of goods consumed by different 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 affected by trade and trade costs. I find that trade liberalization does affect the prices of different goods differently and, as a result, can benefit 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: 2008-01, Revised 2010-01
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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:pra:mprapa:20199

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