A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North‐South Trade

This paper develops a Ricardian model of trade in which goods are indexed according to priority and higher‐indexed goods are consumed only by richer households. South (North) has a comparative advantage in lower‐ (higher‐) indexed goods and, hence, specializes in goods with lower (higher) income elasticities of demand. Product cycles and a southern terms‐of‐trade deterioration result from faster population growth and uniform productivity growth in South and a global productivity improvement. South’s domestic income redistribution policy can improve its terms of trade so much that every household in South may be better off, at the expense of North.