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                  66999.pdf (author's version ) (Open Access)Annual Meeting of the European Economic Association, 20 augustus 200

de Vaal, Albert

Stibora, Joachim

English

Kingston University Research Repository

Trade policy in a Ricardian model with a continuum of goods under nonhomothetic preferences

We develop a Ricardian trade model with a continuum of goods that are ordered
according to priority in consumption. Goods at the lower end of the spectrum are
consumed by all households and when income increases households add higher-ranked
goods to their consumption baskets. We apply this framework to address the issue
of trade liberalization between a poor and rich country. The poor (rich) country has
comparative advantage in the production of lower (higher) ranked goods. We find
that the effects of trade liberalization on the terms of trade, specialization patterns
and consumer welfare might differ fundamentally from the results predicted by trade
models with homothetic preferences. Additionally, assuming nondegenerated income
distributions, we show that the effects of trade liberalization on the relative income
position of poor households depends on how tariff revenues are redistributed. It
appears that the redistribution of tariff revenue from rich to poor households increases
the burden of trade liberalization for poor households

Vaal, A. de

Stibora, J.J.

NARCIS 

Trade Policy in a Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences

Radboud Repository

Trade policy in a Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences

Contains fulltext :
                  131648.pdf (publisher's version ) (Open Access)We develop a Ricardian trade model with a continuum of goods that are ordered
according to priority in consumption. Goods at the lower end of the spectrum are
consumed by all households and when income increases households add higher-ranked
goods to their consumption baskets. We apply this framework to address the issue
of trade liberalization between a poor and rich country. The poor (rich) country has
comparative advantage in the production of lower (higher) ranked goods. We find
that the effects of trade liberalization on the terms of trade, specialization patterns
and consumer welfare might differ fundamentally from the results predicted by trade
models with homothetic preferences. Additionally, assuming nondegenerated income
distributions, we show that the effects of trade liberalization on the relative income
position of poor households depends on how tariff revenues are redistributed. It
appears that the redistribution of tariff revenue from rich to poor households increases
the burden of trade liberalization for poor households.31 p

Trade policy in a Ricardian model with a continuum of goods under nonhomothetic preferences

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