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Non-traded goods and optimal trade policy in a cash-in-advance economy

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Author Info

  • Chi-Chur Chao
  • Chong Yip

Abstract

This paper develops a standard trade model of a small open monetary economy with two traded and one non-traded goods. Money is introduced through a generalized cash-in-advance constraint where the share of goods purchases that must be made using cash, varies across sectors. We find that free trade may be harmful so that alternative policy instruments may be considered to improve welfare. In addition, we study and compare the optimal tariff formula and the optimal consumption tax structure. In the presence of a monetary distortion of the non-traded good, a consumption tax may not Pareto dominate a tariff although the latter bears an additional production burden. This corroborates the theory of second best.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The Journal of International Trade & Economic Development.

Volume (Year): 10 (2001)
Issue (Month): 1 ()
Pages: 23-37

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Handle: RePEc:taf:jitecd:v:10:y:2001:i:1:p:23-37

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Related research

Keywords: Trade Policy; Non-TRADED Goods; Cash In Advance;

References

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  1. Wong, Kar-yiu, 1991. "Welfare comparison of trade situations," Journal of International Economics, Elsevier, vol. 30(1-2), pages 49-68, February.
  2. E. Kwan Choi & Hamid Beladi, 1998. "Welfare Reducing Trade and Optimal Trade Policy," Center for Agricultural and Rural Development (CARD) Publications 98-wp196, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  3. Cramer, J. S. & Reekers, G. M., 1976. "Money demand by sector : A survey for the Netherlands in 1971," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 99-112, January.
  4. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
  5. Theodore, Palivos & Chong K. Yip, 1996. "The Gains from Trade for a Monetary Economy Once Again," Departmental Working Papers _071, Chinese University of Hong Kong, Department of Economics.
  6. Yano, M. & Nugent, J.B. & Lay, R.N., 1995. "Aid, Non-Traded Goods and the Transfer Paradox in Small Countries," Papers 9515, Southern California - Department of Economics.
  7. Jones, Ronald W, 1974. "Trade with Non-traded Goods: The Anatomy of Inter-connected Markets," Economica, London School of Economics and Political Science, vol. 41(162), pages 121-38, May.
  8. Batra, Raveendra N & Beladi, Hamid, 1990. "Pattern of Trade between Underemployed Economies," Economica, London School of Economics and Political Science, vol. 57(228), pages 485-93, November.
  9. Hazari, Bharat R. & Sgro, Pasquale M., 1991. "Urban-rural structural adjustment, urban unemployment with traded and non-traded goods," Journal of Development Economics, Elsevier, vol. 35(1), pages 187-196, January.
  10. Yu, Eden S H, 1982. "Unemployment and the Theory of Customs Unions," Economic Journal, Royal Economic Society, vol. 92(366), pages 399-404, June.
  11. Hamid Beladi & Sugata Marjit, 1996. "An Analysis of Rural-Urban Migration and Protection," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 930-40, November.
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Cited by:
  1. Theodore Palivos & Nikos Tsakiris, 2009. "Trade and Tax Reforms in a Cash-in-Advance Economy," University of Cyprus Working Papers in Economics 1-2009, University of Cyprus Department of Economics.

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