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| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | Within-country inequality and the patterns of trade |
| Organization Unit | |
| Authors |
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| Language |
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| Institution | University of Zurich |
| Series Name | URPP Equality of Opportunity Discussion Paper Series |
| Number | 17 |
| Number of Pages | 66 |
| Date | 2023 |
| Abstract Text | We introduce a demand-side trade model to shed light on the interaction between countries’ income distributions, the patterns of international trade and parallel trade policy restrictions in general equilibrium. We provide a comprehensive theoretical foundation for the role of income inequality for trade that allows distinguishing within- and between-country inequality. To bring differences in the willingness to pay of differentially rich consumers to the forefront of the analysis, we deviate from the canonical model by replacing the standard CES preferences with non-homothetic 0-1 preferences. We characterize and numerically solve the trade equilibrium for a discrete labor endowment distribution with several consumer-income groups. Our model predicts trade intensity to be increasing in the income distribution overlap, which is our preferred proxy for demand similarity. Our model, therefore, provides a theoretical foundation for the Linder hypothesis, that bilateral trade volume is increasing in the similarity of demand structure between two countries. Furthermore, our model predicts a Manhattan effect, capturing that poor consumers are badly off if they are a small minority in a predominantly rich country due to the high price level for basic products. |
| Official URL | https://www.urpp-equality.uzh.ch/dam/jcr:338d4019-830c-45f7-a0f5-939e454a93ad/17_FoellmiSchmidZweimueller2022_InequalityTrade.pdf |
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| Other Identification Number | merlin-id:24215 |
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| Keywords | Within-country inequality, non-homothetic preferences, parallel imports, arbitrage, extensive margin, intensive margin, export zeros, North-South trade, income distribution similarity |