In this paper we attempt to examine the role of social inequality and status effects in driving trade between two countries which differ systematically only in terms of income-distribution using a status-driven model of consumption involving a status and a non-status good. Our model illustrates that when trade opens up, the country characterized by a higher level of inequality is likely to export the non-status good to the country characterized by a lower level of inequality, thus, establishing the extent of inequality as a determining factor behind comparative advantage

Marjit, Sugata

Roychowdhury, Punarjit

Munich Personal RePEc Archive

MPRA
Munich Personal RePEc Archive
Inequality, status effects and trade
Sugata Marjit and Punarjit Roychowdhury
Centre for Studies in Social Sciences, Calcutta (CSSSC), R-1
Baishnabghata Patuli Township, Kolkata – 700094 (INDIA), Centre
for Studies in Social Sciences, Calcutta (CSSSC), R-1
Baishnabghata Patuli Township, Kolkata – 700094 (INDIA)
22. July 2012
Online at http://mpra.ub.uni-muenchen.de/40225/
MPRA Paper No. 40225, posted 23. July 2012 14:52 UTC
1 
 
Inequality, Status Effects and Trade 
Sugata Marjit 
Centre for Studies in Social Sciences, Calcutta, India 
Punarjit Roychowdhury* 
Centre for Studies in Social Sciences, Calcutta, India 
This Draft: July 2012 
 
Abstract 
In this paper we attempt to examine the role of social inequality and status effects in driving 
trade between two countries which differ systematically only in terms of income-distribution 
using a status-driven model of consumption involving a status and a non-status good. Our 
model illustrates that when trade opens up, the country characterized by a higher level of 
inequality is likely to export the non-status good to the country characterized by a lower level 
of inequality, thus, establishing the extent of inequality as a determining factor behind 
comparative advantage. 
Keywords: Inequality, Status effects, Trade. 
JEL Classification: D31, D01, D51, F11. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*Corresponding Author. Address: Centre for Studies in Social Sciences, Calcutta, R-1, Baishnabghata Patuli 
Township, Kolkata 700094, India. Contact No. : +91 9883550728. Email: punarjitroychowdhury@gmail.com 
(Punarjit Roychowdhury). 
2 
 
Introduction 
Can social inequality drive international trade? Although there is a plethora of literature on 
how international trade may affect the income distribution of a country,
1
 not much has been 
written on how social inequality may determine the pattern of international trade. This paper 
makes a first attempt to explore this issue by focusing particularly on status effect – the 
utility-impact of an individual‟s economic position in the society evaluated in terms of her 
own income relative to the average societal-income – that arise naturally in an „unequal 
world‟. To put differently, we intend to analyse the impact of social inequality on trade-
pattern that might emerge in a world where individuals are motivated in their behaviour by a 
concern for social status.  
In the past three decades many papers have been written exploring the linkages between 
status effects and microeconomic outcomes in a variety of contexts (see for example, Frank, 
1985; Cooper et al., 2001; Arrow and Dasgupta, 2010; Moav and Neeman, 2010 and Marjit, 
2010 among many others);
2
 however, a simple theoretical model describing how social 
inequality and status effects may influence the pattern of international trade in a world in 
which every individual‟s utility is contingent upon her relative position in the society is hard 
to come by.  This paper, thus, also seeks to integrate literature on status effects with 
traditional theory of international trade. 
We begin by considering a pure-exchange world that comprises of two countries, North (N) 
and South (S), and two goods, status good (L) and non-status good (M).
3
 To start with we 
assume that identical initial conditions characterize both the countries. That is, population 
size, preference pattern, price of each good, distributions of endowment (and income) and 
consequently, levels of social inequality are identical in both the countries initially. However, 
in country S, unlike country N, there is a benevolent government that re-distributes the total 
resources among all the individuals equally so as to wipe out social inequality. Assuming that 
preferences of every individual in our framework to be status-driven, we go on to derive the 
relative prices of the two commodities in question that prevails in countries N and S 
respectively so as to predict the pattern of trade – based on the doctrine of comparative 
advantage – that might emerge between these two countries which differ systematically only 
in terms of income distribution. Essentially, thus, we intend to examine whether the extent of 
inequality has a crucial role in determining the pattern of trade in a status-sensitive world. 
Model 
Let us begin by considering country N having a population of 𝑛 individuals (𝑛 ≥ 2). We 
assume that income distribution in the economy is such that every individual either earns 
„high income‟ 𝑦𝐴 or „low income‟ 𝑦𝐵, 𝑦𝐴 > 𝑦𝐵. As such, the economy consists of two 
homogeneous income groups – a high income group A and a low income group B, the size of 
                                                          
1
 See Wolff (2000) and Harrison et al. (2010) for an excellent review of literature on trade and inequality.  
2
 Haffetz and Frank (2010) provide an detailed survey of status related literature. Also see Clark et al. (2008) for 
a survey of related body of literature on relative income and happiness. 
3
 We define status goods in line with Fred Hirsch‟s (1976) definition of positional goods as cited in Ireland 
(2001). According to this definition, positional or status goods refer to that class of goods, the consumption 
levels of which are observed and used to rank people in terms of social status (basically, items of conspicuous 
consumption). On the other hand, goods whose consumption levels are not important in ranking people in the 
society belong to the class of non-status goods. 
 
3 
 
the groups being denoted by 𝑛𝐴 and 𝑛𝐵 respectively, 𝑛𝐴 + 𝑛𝐵 = 𝑛. We assume that there is 
no production in the economy and that every individual has an exogenously given 
endowment of goods 𝑀 and 𝐿. Let 𝑀 𝐴 , 𝐿 𝐴 be the endowments of goods 𝑀 and 𝐿 possessed by 
every member of group A and 𝑀 𝐵 , 𝐿 𝐵 be the same possessed by each member of group B. As 
such, the income-endowment equations are 
 𝑦𝐴 = 𝑝𝑀𝑀 𝐴 + 𝐿 𝐴          (1) 
 
                                                        𝑦𝐵 = 𝑝𝑀𝑀 𝐵 + 𝐿 𝐵        (2) 
where 𝑝𝑀  is the relative price of good M. 
Since in our framework, an individual‟s income is completely determined by the value of 
endowments, 𝑦𝐴 > 𝑦𝐵 implies that individuals belonging to group must A possess greater 
endowments of at least one of the two commodities compared to individuals belonging to 
group B. We assume that  𝑦𝐴 > 𝑦𝐵 ⇒ 𝑀 𝐴 > 𝑀 𝐵 as well as 𝐿 𝐴 > 𝐿 𝐵 and also that the 
following relations hold: 
                                                       𝑛𝐴𝑀 𝐴 = 𝜃1 𝑛𝐵𝑀 𝐵                      (3) 
 
                                                              𝑛𝐴𝐿 𝐴 = 𝜃2 𝑛𝐵𝐿 𝐵                                                          (4) 
For simplicity we assume 𝑛𝐴 = 𝑛𝐵 = 𝑛 2 . As such, 𝜃1 > 1 and 𝜃2 > 1. 
Let us now describe the demand side of the economy. Following Frank (1985) and Marjit 
(2010), we posit that in our model, preferences of individuals are influenced by their relative 
position in the society or by their relative social status 𝑠. More specifically, we assume that in 
our model, all individuals have Cobb-Douglas preferences over the consumption of goods 𝑀 
and 𝐿 represented by the utility function 𝑈 𝑀𝑖 , 𝐿𝑖 , the structure of which essentially depends 
on 𝑠 which is defined as 
𝑠 = 𝑦𝑖 𝑦   
where 𝑦𝑖  is the income of an individual belonging to the 𝑖
th
 class (𝑖 = 𝐴,𝐵) and 𝑦  is the mean 
income of the society given by 
𝑦𝐴+𝑦𝐵
2
. 
In order to describe how perceived social inequality and consequent status effects affects 
individual welfare in our model, we make the following assumptions. 
Assumption 1: Inequality hurts 
This implies that having below the average income in a society reduces individual utility. Our 
assumption will be that being above does not matter, but being below definitely hurts. This 
asymmetry is deliberate to highlight the implications of belonging to the downside of 
inequality. 
Assumption 2: Inequality increases marginal rate of substitution of L for M
4
 
Having lower than average income increases the marginal rate of substitution of L for M. 
That is, people with lower than average income wants to give up more of M for consuming an 
extra unit of L than those whose income is above the average. This is directly drawn from the 
                                                          
4
 We define the marginal rate of substitution of L for M as the number of units of commodity M that must be 
given up in exchange for an extra unit of commodity L so that the consumer maintains the same level of 
satisfaction. 
4 
 
experimental social psychology literature where intensity of desire to consume the status 
good seems to be greater among those who are psychologically affected by social inequality 
(Sivanathan and Petit, 2010). 
Based on these assumptions, we invoke the following log linear utility function to represent 
preference of a typical individual belonging to the 𝑖th income group 
                                                  𝑈(𝑀𝑖 , 𝐿𝑖) = 𝛿[log𝑀𝑖 + 𝜙 log 𝐿𝑖]         (5) 
We put the following restrictions on 𝛿 and 𝜙: 
     𝛿  
= 1        for 𝑠 > 1 
< 1        for 𝑠 < 1
           (6) 
(follows directly from assumption 1). 
     𝜙  
= 1         for 𝑠 > 1 
> 1        for 𝑠 < 1
        (7) 
(follows directly from assumption 2). 
Further, for inequality to hurt in equilibrium, 𝛿𝜙 < 1.5 
The demand functions obtained by maximizing (5) subject to the ordinary income budget 
constraint 𝑦𝑖 = 𝑝𝑀𝑀𝑖 + 𝐿𝑖  are as follows 
                                                    𝑀 𝑖 =  
𝑦𝑖
2𝑝𝑀
 for i = A
𝑦𝑖
(1+𝜙)𝑝𝑀
 for i = B
       (8) 
                                                     𝐿 𝑖 =  
𝑦𝑖
2
 for i = A
𝜙𝑦 𝑖
(1+𝜙)
 for i = B
       (9) 
The excess demand equations for goods M and L is are as follows 
                                          𝜓𝑀 𝑝𝑀 =
𝑛
2
𝑀 𝐴 +
𝑛
2
𝑀 𝐵 −
𝑛
2
𝑀 𝐴 −
𝑛
2
𝑀 𝐵                          (10) 
                                            𝜓𝐿(𝑝𝑀) =
𝑛
2
𝐿 𝐴 +
𝑛
2
𝐿 𝐵 −
𝑛
2
𝐿 𝐴 −
𝑛
2
𝐿 𝐵                                (11) 
Using equations (1) to (4) and setting either (10) or (11) equal to zero (since in equilibrium 
markets clear for both goods) and solving for 𝑝𝑀 , we get 
                𝑝𝑀 =
𝐿 𝐵 
1
1+𝜙
+
𝜃2
2
 
𝑀 𝐵 
𝜙
1+𝜙
+
𝜃1
2
 
                   (12) 
This is the equilibrium relative price of good M that would prevail in country N. 
                                                          
5
 If inequality hurts in equilibrium, 𝛿[log𝑀 𝐵 + 𝜙 log 𝐿 𝐵] − [log𝑀 𝐴 + log 𝐿 𝐴] < 0 . Since log𝑀 𝐵 < log𝑀 𝐴  (and 
hence, 𝛿 log𝑀 𝐵 < log𝑀 𝐴) and log𝐿 𝐵 > log 𝐿 𝐴  (see (8) and (9)), for inequality to hurt 𝛿𝜙 < 1. Note that an 
implicit assumption here is that log values of the demand functions are strictly positive. Hence we must assume 
that  𝑦𝑖 > 𝑚𝑎𝑥  1 + 𝜙 ,  1 + 𝜙 𝑝𝑀 .  
5 
 
Country S has exactly the same initial supply-demand conditions as that of country N except 
that in S there a benevolent government which intends to wipe out social inequality by re-
distributing resources among all 𝑛 individuals so as to make 𝑦𝐴 = 𝑦𝐵 = 𝑦  where 𝑦  is the 
income of an individual after re-distribution. Essentially thus the government distributes 
𝑛
2
𝑀 𝐵 𝜃1 − 1  of good M and 
𝑛
2
𝐿 𝐵(𝜃2 − 1) of good L equally among 𝑛 individuals. 
Following re-distribution, therefore, each member of the population of country S has 
𝑀 𝐵 +
1
2
𝑀 𝐵(𝜃1 − 1) of good M and 𝐿 𝐵 +
1
2
𝐿 𝐵(𝜃2 − 1) of good L. Consequently, in country 
S, following re-distribution 𝑠𝑖 = 1 ∀ 𝑖 ⇒ 𝛿 = 𝜙 = 1. Under such conditions utility 
maximization yields the following demand functions 
                                                         𝑀 𝑖
′ =
𝑦 
2𝑝𝑀
 ∀ 𝑖                     (13) 
                                                           𝐿 𝑖
′ =
𝑦 
2
 ∀ 𝑖                                  (14) 
where 
                           𝑦 = 𝑝𝑀  𝑀 𝐵 +
1
2
𝑀 𝐵(𝜃1 − 1) +  𝐿 𝐵 +
1
2
𝐿 𝐵(𝜃2 − 1) .                  (15) 
The excess demand functions for goods M and L are given by 
                                    𝜓𝑀
′ (𝑝𝑀) = 𝑛𝑀 𝑖
′ − 𝑛  𝑀 𝐵 +
1
2
𝑀 𝐵(𝜃1 − 1)                   (16) 
                                     𝜓𝐿
′ (𝑝𝑀) = 𝑛𝐿 𝑖
′ − 𝑛  𝐿 𝐵 +
1
2
𝐿 𝐵(𝜃2 − 1)                              (17) 
Using (15) and setting either (16) or (17) equal to zero and solving for 𝑝𝑀  as before, we 
obtain relative equilibrium price of good M prevailing in country S, where re-distribution 
takes place, as 
                                                            𝑝𝑀
′ =
𝐿 𝐵 
1
2
+
𝜃2
2
 
𝑀 𝐵 
1
2
+
𝜃1
2
 
              (18) 
In order to compare (12) and (18), we subtract (12) from (18) and simple manipulation yields 
           𝑝𝑀
′ − 𝑝𝑀 =
1
2
 
𝜙
1+𝜙
−
1
1+𝜙
 +
𝜃1
2
 
1
2
−
1
1+𝜙
 +
𝜃2
2
 
𝜙
1+𝜙
−
1
2
 > 0, as 𝜙 > 1                (19) 
which implies 
𝑝𝑀
′ > 𝑝𝑀 . 
This means that relative price of non-status good is higher in country S compared to country 
N. Therefore, following the doctrine of comparative advantage, if trade opens up, country N, 
which is characterized by social inequality, will export the non-status good to country S, in 
which there is no social inequality following re-distribution of resources, and will import the 
status good from it.
6
  
 
                                                          
6
 It is evident that re-distribution policy of the government of country S has a vital role in our model. Had the 
government not re-distributed the resources to erase social inequality (and hence status effects), no trade would 
have taken place between the countries N and S. 
6 
 
Conclusion 
The objective of this paper was to explore how inequality and consequent status effects may 
influence international trade in a world in which individuals care about their relative position 
in the society. Towards that end, we constructed a simple pure exchange model involving two 
countries, with identical initial conditions, and two goods, a status good and a non-status 
good. We, however, assumed that in one of the countries the government re-distributes 
resources among every individual so as to bring about social equality. Our model shows that, 
when trade opens up, the country that is characterized by inequality will end up exporting the 
non-status good to the country in which all individuals are „equal‟ and will be importing the 
status good from it. Clearly, this is a direct outcome of the asymmetry deliberately introduced 
in our model through characterizing the two countries by differential degrees of social 
inequality. 
The simple model constructed thus clearly illustrates how social inequality and consequent 
status effects may drive trade in a status-concerned world. We observe that status-driven 
trade, while on one hand, is likely to flood the relatively more unequal country with status 
goods, there may occur a dearth of non-status good in that country. Consequently, the relative 
price of the non-status good will tend to rise. This in fact is a reason for grave concern. Since, 
the class of non-status goods include necessary items such as nutrition good, the low income 
people‟s capability to procure such goods is likely to get severely damaged following a rise in 
price. As such, it might so happen that the low income people (of the country characterized 
by inequality) who of course were not „eating‟ as much as the high income people but 
perhaps were „eating enough to survive‟, might eventually end up „starving‟, thus, getting 
trapped in hunger-based poverty trap
7
 as a result of status-driven trade. 
References 
[1] Arrow, Kenneth and Partha Dasgupta (2009), “Conspicuous Consumption, Inconspicuous Leisure”, 
The Economic Journal, Vol. 119, Issue 541, pp. F497-F516. 
[2] Banerjee, Abhijit and Esther Duflo (2011), Poor Economics, Random House, India. 
[3] Clark, Andrew E., Paul Frijters, and Michael A. Shields (2008), “Relative Income, Happiness, and 
Utility: An Explanation for the Easterlin Paradox and Other Puzzles.” Journal of Economic Literature, 
Vol. 46, No. 1, pp. 95-144. 
[4] Cooper, Ben, Cecilia Garcia-Penalosa and Peter Funk (2001), “Status Effects and Negative Utility 
Growth”, The Economic Journal, Vol. 111, Issue 473, pp. 642-665. 
[5] Frank, Robert H. (1985), “The Demand for Unobservable and Other Nonpositional Goods”, The 
American Economic Review, Vol. 75, No.1, pp. 101-116.  
[6] Haffetz, Ori and Robert H. Frank (2011), “Preferences for Status: Evidence and Economic 
Implications”, in Jess Benhabib, Mathew O. Jackson and Alberto Bisin (eds.), Handbook of Social 
Economics, Vol. 1A, pp. 69-91, North-Holland (Elsevier Imprint), Amsterdam, Netherlands. 
[7] Harrison, Ann, John McLaren and Margaret S. McMillan (2010), “Recent Findings on Trade and 
Inequality”, NBER Working Paper Series, No. 16425. 
[8] Ireland, Norman J. (2001), “Optimal Income Tax in the Presence of Status Effects”, Journal of Public 
Eonomics, Vol. 81, Issue 2, pp. 193-212. 
[9] Marjit, Sugata (2010), “Conflicting Measures of Poverty and Inadequate Savings by the Poor – The 
Role of Status Driven Utility Function”, Discussion Paper No. 424, School of Economics, The 
University of Queensland, Australia. 
[10] Moav, Omer and Zvika Neeman  (2010), “Status and Poverty”,  Journal of the European Economic 
Association, Vol. 8, Issues 2-3, pp 413-420. 
[11] Sivanathan, Niro and Nathan C. Pettit (2010) “Protecting the self through consumption: Status goods as 
affirmational commodities”,   Journal of Experimental Social Psychology, Vol. 46, No. 3, 564-570. 
[12] Wolff, Edward N. (2000), “Trade and Inequality: A Review of Literature”, U.S. Trade Deficit Review 
Commission. Online version available at http://govinfo.library.unt.edu/tdrc/research/tradelit.pdf 
                                                          
7
 See Banerjee and Duflo (2011) for a detailed discussion on hunger-based poverty traps. 


Inequality, status effects and trade

https://mpra.ub.uni-muenchen.de/40225/1/MPRA_paper_40225.pdf

Inequality, status effects and trade

Abstract

Similar works

Full text

Available Versions

Munich Personal RePEc Archive