Working Paper: NBER ID: w10087
Authors: Devashish Mitra; Vitor Trindade
Abstract: We incorporate demand-side considerations in trade in a systematic but straightforward way. We do so by focusing on the role of inequality in the determination of trade flows and patterns. With nonhomothetic preferences, when countries are similar in all respects but asset inequality, we find that trade is driven by specialization in consumption, not production. These assumptions allow us to generate some interesting international spillover effects of redistributive policies. We also look at the effects of combining inequality and endowment differences on trade flows, and see that this has implications for the mystery of the missing trade.' We then study a model of monopolistic competition, and find a novel V-shaped relationship between the ratio of inter-industry to intra-industry trade and a country's inequality. Finally, we look at how international differences in factor endowments affect this relationship between the ratio of inter- to- intra-industry trade and inequality. Our theory formalizes as well as modifies Linder's conjecture about the relationship between intraindustry trade and the extent of similarity between trading partners.
Keywords: inequality; trade; non-homothetic preferences; redistributive policies
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inequality (D63) | aggregate demand (E00) |
| aggregate demand (E00) | trade patterns (F10) |
| inequality (D63) | consumption patterns (D10) |
| consumption patterns (D10) | trade flows (F10) |
| asset inequality (D31) | trade flows (F10) |
| redistributive policies (H23) | income inequality in other countries (D31) |
| inequality (D63) | trade ratios (F10) |
| factor endowments (D29) | trade flows (F10) |