We develop a framework for studying how differences in the level and dispersion of per-capita in-come affect trade structure and welfare in a two-country model. Thereby, we assume that consumers have PIGL preferences, which admit a representative consumer and thus facilitate the aggregation of heterogeneous consumer demand even if Engel curves are not linear. We embed the resulting demand system into a textbook model of the home-market effect, with two sectors of production and one input factor. We associate the basic outside good with a necessity and the sophisticated differentiated good with a luxury, and we assume that heterogeneity of income arises due to heterogeneity of households in their effective labor supply. Using this model, we show that in line with the home-market effect countries have a trade surplus in the good for which they have relatively higher domestic demand, making the country with a higher level and dispersion of per-capita income a net exporter of the so-phisticated good. However, the structure of trade is irrelevant for welfare in the open economy. This changes when considering rent sharing in the sophisticated goods sector, and we show that in this case feedback effects of trade on the level and dispersion of income can lead to losses from trade in the country exporting the basic good.