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Real Exchange Rate Adjustment and the Welfare Effects of Oil Price Decontrol

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  • Paul R. Krugman

Abstract

Conventional analysis of the welfare effects of U.S. oil price regulation in the 1970's focuses on the deadweight losses in the oil market. This paper argues that such analysis substantially understates the benefits from decontrolling prices, because decontrol will lead to an improvement in the U.S. terms of trade with respect to other oil importing countries. A simple model of the relationship between oil decontrol and the terms of trade is developed, and the impact is calculated for plausible parameter values. The results suggest that the terms of trade benefits are several times larger than the benefits as conventionally measured.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0658.

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Date of creation: Apr 1981
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Publication status: published as (Published as "Differences In Income Elasticities and Trends in Real Exchange Rates") European Economic Review, Vol. 33, no. 5 (1989):1031-1046.
Handle: RePEc:nbr:nberwo:0658

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  1. Samuelson, Paul A., 1971. "An exact Hume-Ricardo-Marshall model of international trade," Journal of International Economics, Elsevier, vol. 1(1), pages 1-18, February.
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