Welfare Reducing Trade and Optimal Trade Policy

This paper shows that free trade reduces the welfare of a small country with unemployment unless the free trade price if the importable falls below the autarky equivalent price. A decline in the price of the importable from the autarky level not only improves the terms of trade but also reduces employment and production in the importable sector. A numerical example illustrates that the autarky equivalent price of the importable can be substantially lower than the autarky price. If an optimal tariff is used, however, restricted trade improves welfare above the autarky level.


Issue Date:
1998
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/18513
Total Pages:
18
Series Statement:
CARD Working Paper 98-WP 196




 Record created 2017-04-01, last modified 2017-08-24

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