Income Distribution, Factor Endowments, and Trade Revisited: The Role of Non-Tradable Goods

31 Pages Posted: 21 Feb 2011 Last revised: 13 Jul 2016

See all articles by Sebastian Galiani

Sebastian Galiani

University of Maryland - Department of Economics

Daniel Heymann

Universidad de Buenos Aires

Nicolás E. Magud

International Monetary Fund (IMF)

Date Written: July 12, 2016

Abstract

We introduce non-tradable goods to the Heckscher-Ohlin-Samuelson (HOS) model to study the distributive effects of terms of trade shocks. We show that the employment of resources in activities producing exclusively for the local market induces a crucial association between domestic spending and factor demand and prices, which is absent in the usual HOS framework. Specifically, in a two-sector economy (producing only exportable and non-tradable goods) there are no redistributive effects of external terms of trade shifts, i.e., no Stolper-Samuelson-type of effect. By extending the model to the domestic production of a third, importable good, we show that distributional tensions arise. Distributional conflicts occur within urban labor groups (skilled vs. unskilled) and not only between the “traditional” rural vs. urban factors. Finally, export taxes are imposed to re-distribute the effects of external shocks. We show that the ability of the government to cushion the impact of the terms of trade shift on the economy’s income distribution depends crucially on the use of the tax revenues.

Suggested Citation

Galiani, Sebastian and Heymann, Daniel and Magud, Nicolas E., Income Distribution, Factor Endowments, and Trade Revisited: The Role of Non-Tradable Goods (July 12, 2016). Available at SSRN: https://ssrn.com/abstract=1764110 or http://dx.doi.org/10.2139/ssrn.1764110

Sebastian Galiani (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Daniel Heymann

Universidad de Buenos Aires ( email )

Buenos Aires
Argentina

Nicolas E. Magud

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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