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Income growth and inequality: The threshold effects of trade and financial openness

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  • Lim, G.C.
  • McNelis, Paul D.

Abstract

Empirical studies about whether trade and financial openness lead to favourable Gini outcomes yield mixed results and theoretical work suggest that the effects likely depend on the stage of economic development and the nature of the production structure. This paper proposes a model of a small open economy with two key components – a component with heterogeneous agents earning a range of incomes and a component with traded and non-traded goods and associated financial linkages. Simulations show that both trade and financial openness can lead to improvements in both income growth and equality once an economy crosses a critical threshold in capital intensity and in the use of imported intermediate goods in the production process.

Suggested Citation

  • Lim, G.C. & McNelis, Paul D., 2016. "Income growth and inequality: The threshold effects of trade and financial openness," Economic Modelling, Elsevier, vol. 58(C), pages 403-412.
    • Handle: RePEc:eee:ecmode:v:58:y:2016:i:c:p:403-412
    DOI: 10.1016/j.econmod.2016.05.010
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    More about this item

    Keywords

    Gini coefficient; Openness; Heterogeneous agents;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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