An Adverse Social Welfare Effect of Quadruply Gainful Trade

• Published in: East Asian economic review Vol. 24; no. 3; pp. 207 - 235
• Main Authors: Stark, Oded, Kosiorowski, Grzegorz
• Format: Journal Article
• Language: English
• Published: Sejong Korea Institute for International Economic Policy (KIEP) 01.09.2020; Korea Institute for International Economic Policy; 대외경제정책연구원
• Subjects: change of social space; decrease of income gaps; Deprivation; Developing countries; Economic growth; Escalation; Free trade; gains from trade; Income distribution; Income inequality; increase of incomes; integration; International trade; LDCs; low relative income; quadruply gainful trade; Real income; Social space; Social welfare; Spheres; Trade liberalization; trembling trade; Wage differential; 경제학
• ISSN: 2508-1640; 2234-8867; 2508-1667; 2287-8793
• DOI: 10.11644/KIEP.EAER.2020.24.3.377

Acknowledging that individuals dislike having low relative income renders trade less attractive when seen as a technology that integrates two economies by merging separate social spheres into one. We define a "trembling trade" as a situation in which gains from trade are less than losses in relative income, with the result that global social welfare is reduced. We show that a "trembling trade" can arise even when trade is more gainful in four ways: through trade the absolute income of everyone increases, the income gap in both economies is reduced, as is the income gap between the trading economies. However, trade brings populations, economies, or markets that were not previously connected closer together in social space. As a consequence, separate social spheres merge, and people's social space and their comparators are altered. Assuming that people like high (absolute) income and dislike low relative income, the aggregate increase in unhappiness caused by the trade-induced escalation in relative deprivation can result in a negative overall impact of trade on (utilitarian-measured) social welfare, if the absolute income gains are not large enough to mitigate the relative income losses.