Economic Inequality and International Trade

Sinergia Project CRSI11_132272 / 1 financed by the SNF

This is a joint project with three institutions participating. It aims at producing high quality research in the area of economic inequality and international trade.

Principal Investigator is Prof. Dr. Josef Zweimüller from the University of Zurich, project partners are Prof. Dr. Peter Egger from the ETH Zurich and Prof. Dr. Reto Föllmi from the University of St. Gallen.

This project will study the implications of per-capita incomes and within-country income inequalities for the patterns and volume of international trade. Our project will address various interesting questions. How will the growing middle classes in emerging markets affect the patterns of international trade? How will rising inequalities within rich countries impact on trade structures and trade volumes? How will trade liberalizations affect the poor and the middle classes in the developing and the developed world? How will income inequality within and between countries affect the international division of labor?

Our basic approach aims to extend the existing literature in various ways. First, the basic idea of our project is to look at within-country income and wealth inequalities as determinant of international trade. Hence our focus is quite different from a long tradition in international economics that has been exploring the opposite chain of causality: the impact of international trade on factor prices and the resulting inequality in the distribution of income among households within countries or among representative factor owners across countries. Second, our focus is on the distribution of income among citizens within and across countries. This is different from the vast majority of the existing literature that emphasizes the importance of countries’ aggregate GDP for trade outcomes. We go beyond the literature by studying theoretical models with non-homothetic preferences in which per capita incomes and income inequality play a central role. Third, we look at empirical evidence for the impact of per-capita incomes and income inequality for the extensive, intensive and quality margins of international trade.