Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/327717 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 12107
Publisher: 
Munich Society for the Promotion of Economic Research - CESifo GmbH, Munich
Abstract: 
We develop a two-country model of international trade featuring non-homothetic preferences and income inequality, generating a price schedule where cheap necessities coexist with expensive luxury goods. A central mechanism driving price differences is firm's ability to shift fixed costs between countries, shaping trade patterns and welfare. In a North-South setting, poor consumers in the rich country are most negatively affected by this fixed cost shifting, leading to a Manhattan effect. Following mean-preserving redistribution, import volumes rise in the unequal country, and fall in the more equal one.
Subjects: 
trade
income inequality
nonhomothetic preferences
pricing-to-market
JEL: 
L11
F12
F60
Document Type: 
Working Paper
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