Consumer Heterogeneity, Free Trade, and the Welfare Impact of Income Redistribution

Abstract

Demographic differences, like young and elderly, and healthy and disabled, are summarized as consumers' heterogeneity in expenditure shares, and introduced into an otherwise standard HO model, together with income distribution in this paper. We prove that free trade may hurt consumers who spend more on the exporting good if the volume of trade is small, while redistributing more income to consumers who spend more on the exporting good may make everyone in the country better off. By contrast, redistributing more income to consumers who spend more on the importing good may make everyone in the country worse off.

Keywords: Consumers' Heterogeneity, Heckscher-Ohlin Model, Income Distribution, Welfare

JEL Classification: D61 and F11