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Does Preferential Trade Benefit Poor Countries? A General Equilibrium Assessment with Nonhomothetic Preferences

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  • Albert de Vaal
  • Joachim Stibora

Abstract

We study the effects of preferential trade agreements (PTA) in a model where the income matters for consumption patterns. We develop a three-country Ricardian trade model in which goods are ranked according to priority and where economies differ in their income level. The poorest (richest) country has a comparative advantage in the production of lowest-ranked (highest-ranked) goods, specializing in goods with low (high) income elasticities in demand. The medium rich country specializes in the production of the intermediate-ranked commodities. We .nd that being excluded from a PTA is detrimental for a low-income country, but not for the high-income country. Becoming a member of a PTA does also not guarantee welfare gains for the low income country, unless it is so poor that it cannot import the higher-ranked goods that the rich country produces.

Suggested Citation

  • Albert de Vaal & Joachim Stibora, 2006. "Does Preferential Trade Benefit Poor Countries? A General Equilibrium Assessment with Nonhomothetic Preferences," DEGIT Conference Papers c011_057, DEGIT, Dynamics, Economic Growth, and International Trade.
    • Handle: RePEc:deg:conpap:c011_057
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    File URL: http://degit.sam.sdu.dk/papers/degit_11/C011_057.pdf
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    References listed on IDEAS

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    1. Stibora, Joachim & de Vaal, Albert, 2006. "Hub and spoke bilateralism and the global income distribution," Economics Discussion Papers 2006-7, School of Economics, Kingston University London.
    2. Lilas Demmou, 2007. "Technical progress in North and welfare gains in South under nonhomothetic preferences," PSE Working Papers halshs-00588310, HAL.

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    Keywords

    Ricardian trade model; asymmetric demand complementarities; Customs Union; income distribution;
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