International trade and “Catching up with the Joneses”: Are the consumption patterns convergent?

Abstract

We use a dynamic international trade model to analyse the implications of international trade for agents’ preferences and economic growth. This model is based on the home market effect with external habit formation (“catching up with the Joneses”) and “learning by doing” in production. We demonstrate the following: the historical composition of consumption in countries determines industrialization after trade; the preferences of agents converge after trade, independent of the economic results; and the welfare effects of trade may be positive or negative depending on trading partner characteristics. In some scenarios, autarky is strictly preferred to trade. Thus, international trade does not necessarily imply greater welfare, as is the typical result in a static context under CES preferences.