Abstract

International trade affects consumption prices, with potentially different impacts on poor and rich consumers. We quantify these unequal impacts building on the Almost Ideal Demand System (AIDS) gravity model of Fajgelbaum and Khandelwal (2016). We augment the original model with a home bias in tastes or, alternatively, more complex trade costs. In this setup, we show that the structural parameters governing the welfare gains are highly sensitive to the determinants of spending on domestic goods. These extensions largely weaken the pro-poor bias of trade. Overall, we conclude that the AIDS gravity framework does not generate robust results about the distributive effects of trade within countries.

Previous version

IRES Discussion Paper 2021/05

Funding

This work was supported by the Fonds de la Recherche Scientifique – FNRS under the CDR Grant J.0138.18 “Measuring inequality from trade data”.