Wealth Distribution, Pattern of Trade and Capital Flows- Role of Credit Market Imperfection

Abstract

This paper explores the impact of wealth distribution on pattern of trade and capital flows with credit rationing. More egalitarian societies may aggravate the impact of credit rationing and that may lead to import of credit or capital intensive good. Low price of capital in autarky may reflect the lack of demand for credit due to scarcity of entrepreneurs and not due to capital abundance and eventually may lead to capital outflow from a capital scarce country. This is a different way of echoing the sentiment of the well-known “Lucas Paradox”. We also show the possibility of trade and capital flow being complements and not substitutes. Following trade, within group income distribution does not change but across groups might.