Empirical studies about whether trade and financial openness lead to favourable Gini outcomes yield mixed results and theoretical work suggest that the effects likely depend on the stage of economic development and the nature of the production structure. This paper proposes a model of a small open economy with 2 key components – a component with heterogeneous agents earning a range of incomes and a component with traded and non-traded goods and associated financial linkages. Simulations show that both trade and financial openness can lead to improvements in both income growth and equality once an economy crosses a critical threshold in capital intensity and in the use of imported intermediate goods in the production process.
This work is part of the ‘Macroeconomics in Low-income countries’ programme
G.C. Lim, Paul D. McNelis, Income growth and inequality: The threshold effects of trade and financial openness, Economic Modelling, Volume 58, 2016, Pages 403-412, https://doi.org/10.1016/j.econmod.2016.05.010.
Income growth and inequality: The threshold effects of trade and financial openness
Published 16 November 2016