On the Conditions that Preclude the Existence of the Lerner Paradox and the Metzler Paradox
AbstractThe Lerner paradox is the possibility that a tariff on an import good might worsen a country’s terms of trade, and the Metzler paradox is the possibility that a tariff on an import good might reduce a country’s import price. In a general equilibrium framework with multiple goods, this paper shows that the combination of the invertibility of the Slutsky matrix for the world economy and its similarity across countries will preclude both of the paradoxes, and that the combination of the gross-substitutes assumption for the world demand and the substitute assumption for the demand of an import country property of goods will preclude the Lerner paradox. A modified condition for the Slutsky matrix combined with the gross substitute for the world demand will do the same for the Metzler paradox. A concept of non-surpassed diagonal is used in deriving the result.
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Bibliographic InfoPaper provided by Economic Growth Center, Yale University in its series Working Papers with number 931.
Length: 17 pages
Date of creation: Feb 2006
Date of revision:
Lerner paradox; Metzler paradox; tariffs; terms of trade; gross substitutes; dominant diagonal matrix;
Find related papers by JEL classification:
- C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
- F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
- F11 - International Economics - - Trade - - - Neoclassical Models of Trade
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