Trade policy in a Ricardian model with a continuum of goods under nonhomothetic preferences

We develop a Ricardian trade model with a continuum of goods that are ordered according to priority in consumption. Go o ds at the lower end of the spectrum are consumed by all households and when income increases households add higher-ranked goods to their consumption baskets. We apply this framework to address the issue of trade liberalization between a p o or and rich country. The p o or (rich) country has comparative advantage in the production of lower (higher) ranked goods. We find that the effects of trade liberalization on the terms of trade, specialization patterns and consumer welfare might differ fundamentally from the results predicted by trade models with homothetic preferences. Additionally, assuming nondegenerated income distributions, we show that the effects of trade liberalization on the relative income position of poor households depends on how tariff revenues are redistributed. It appears that the redistribution of tariff revenue from rich to p o or households increases the burden of trade liberalization for poor households.