Abstract

I develop a trade model with non-homothetic preferences that considers within-country inequality as a determinant of trade patterns. A (Price-Independent Generalized Linear) utility function allows for the aggregation of individual demand functions and summarizing the within-country income distribution in one parameter in the aggregate demand function. With this demand structure I derive a gravity equation that includes the aforementioned parameter. The model predicts that (ceteris paribus) a country with a more equal income distribution consumes, produces, and exports more manufacturing goods relative to non-tradable services. I estimate the structural parameters of the model to calibrate a multi-country trade model for 13 OECD countries in the year 2000. Numerical simulations show that with respect to within-country equality the elasticity of exports is around 0.9, while the elasticity of imports is around 0.6 for the United States. Lastly, I find that gains from trade are higher for individuals in lower income deciles, as they consume relatively more manufacturing goods than individuals in the higher income deciles.

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