Preference Structures, Wealth Distribution, and Patterns of Trade in a Global Economy

Abstract

This study integrates the dynamic 2×2×2 Hechscher-Ohlin model with the neoclassical growth model, considering heterogeneous households, to explore the relationship between preference structures, wealth distribution, and international trade in a unified setting. We demonstrate that if households have homothetic utility functions, the long-run trade pattern depends solely on the initial distribution of capital between two countries. Conversely, if preferences are non-homothetic, the initial distribution of wealth among households also influences long-run trade patterns. Numerical examples further examine the wealth distribution in each country, showing that the initially poor can catch up with the initially rich.