Université de Lausanne
Ecole des HEC
Département d'économétrie et d'économie politique

Wednesday October 8, 2008, 13:00
Extranef, Dorigny, room 126

Josef ZWEIMÜLLER
(Universität Zürich)

Income Effects in the Theory of Monopolistic Competition and International Trade

Abstract
We present a model of monopolistic competition and international trade in which income effects play a crucial role. It is assumed that goods are indivisible and consumers decide whether or not to purchase a given variety. This provides us with a simple and tractable framework in which prices and mark-ups of monopolistic producers are determined by consumers.income levels. Our model generates two interesting results. First, we find that all goods are traded when countries have very similar per-capita incomes, whereas countries remain in autarky when they are very dissimilar. For intermediate income differences only a subset of goods is internationally traded. This is consistent with the "Linder hypothesis" according to which trade intensity is inversely related to differences in trading partners' per-capita incomes. Second, we find that the gains from trade liberalization (a reduction of transport costs) may be divided very unequally between (rich and poor) countries. When transportation costs are relatively high, rich and poor country gain from trade liberalization. However, when transportation costs are below a certain threshold, the poor country may lose and oppose further trade liberalization.

Web site of the seminar (with paper online): http://www.hec.unil.ch/deep/evenements-english/e-sem-all-2008-09.htm