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Welfare Reducing Trade and Optimal Trade Policy

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  • E. Kwan Choi
  • Hamid Beladi

Abstract

In contrast to some trade theorists' long-held beliefs, this study shows that free trade reduces the welfare of a small country with unemployment unless the free trade price of the importable falls below the autarky equivalent price. This study formulates a disequilibrium trade model with sticky money wages that has been generalized to fixed-price economies where output prices as well as wages are fixed, independent of excess demand or supply in the labor and goods markets. After describing the model and its solution, the authors discuss the implications of changing tariff rates on foreign products, construct a numerical example showing that their result is possible for many countries with unemployment, and analyze the issues of optimal tariff.

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File URL: http://www.card.iastate.edu/publications/DBS/PDFFiles/98wp196.pdf
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Bibliographic Info

Paper provided by Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University in its series Food and Agricultural Policy Research Institute (FAPRI) Publications with number 98-wp196.

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Date of creation: Aug 1998
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Handle: RePEc:ias:fpaper:98-wp196

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  1. Choi, E Kwan & Beladi, Hamid, 1993. "Optimal Trade Policies for a Small Open Economy," Economica, London School of Economics and Political Science, vol. 60(240), pages 475-86, November.
  2. Batra, Ravi, 1992. "The Fallacy of Free Trade," Review of International Economics, Wiley Blackwell, vol. 1(1), pages 19-31, November.
  3. Batra, Raveendra & Pattanaik, Prasanta K, 1970. "Domestic Distortions and the Gains from Trade," Economic Journal, Royal Economic Society, vol. 80(319), pages 638-49, September.
  4. 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.
  5. Yu, Eden S H, 1982. "Unemployment and the Theory of Customs Unions," Economic Journal, Royal Economic Society, vol. 92(366), pages 399-404, June.
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Cited by:
  1. Chi-Chur Chao & Chong Yip, 2000. "Urban unemployment and optimal trade policy in a cash-in-advance economy," Journal of Economics, Springer, vol. 71(1), pages 59-77, February.
  2. Chi-Chur Chao & Chong Yip, 2001. "Non-traded goods and optimal trade policy in a cash-in-advance economy," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 10(1), pages 23-37.

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