This paper constructs a two-country general equilibrium trade model, where an income transfer finances the production of a public input in the recipient country. Within this framework, the paper examines the effects of the income transfer on the terms of trade and welfare, and shows that the transfer may enrich the donor country and impoverish the recipient country. The paper also demonstrates that a small income transfer raises world welfare if the marginal revenue product of the public input exceeds its unit cost. In this case, a welfare imporvement is possible for both the donor and the recipient countries.