Trade , Non - Homothetic Preferences , and the Impact of Country Size on Wages ∗

We study the impact of country size on wages in a two-country trade model with monopolistic competition and non-homothetic preferences. Since there is renewed interest in nonhomothetic preferences and variable markups, we revisit standard results on wages obtained using homothetic (CES) preferences. The standard results are that, under free trade, wages are equal and that, with iceberg costs, the larger country has a higher wage. With non-homothetic preferences, these results do not necessarily hold and it is important to distinguish between the number of workers and the labor endowment per worker. Under free trade, the relative wage depends on the relative labor endowment per worker under certain conditions. With iceberg costs, the larger country does not necessarily get the higher wage unless there is a representative consumer.