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New goods, old theory, and the welfare costs of trade restrictions

The typical economic model implicitly assumes that the set of goods in an economy never changes. As a result, the predicted efficiency loss from a tariff is small, on the order of the square of the tariff rate. If we loosen this assumption and assume that international trade can bring new goods into an economy, the fraction of national income lost when a tariff is imposed can be much larger, as much as two times the tariff rate. Much of this paper is devoted to explaining why this seemingly small change in the assumptions of a model can have such important positive and normative implications. The paper also asks why the implications of new goods have not been more extensively explored, especially given that the basic economic issues were identified more than 150 years ago. The mathematical difficulty of modeling new goods has no doubt been part of the problem. An equally, if not more important stumbling block has been the deep philosophical resistance that humans feel toward the unavoidable logical consequence of assuming that genuinely new things can happen at every juncture: the world as we know it is the result of a long string of chance outcomes.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 43 (1994)
Issue (Month): 1 (February)
Pages: 5-38

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Handle: RePEc:eee:deveco:v:43:y:1994:i:1:p:5-38
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  1. Grossman, G.M. & Helpman, E., 1989. "Quality Ledders In The Theory Of Growth," Papers 148, Princeton, Woodrow Wilson School - Public and International Affairs.
  2. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
  3. Schultz, Theodore W, 1975. "The Value of the Ability to Deal with Disequilibria," Journal of Economic Literature, American Economic Association, vol. 13(3), pages 827-46, September.
  4. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers 527, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. repec:oup:qjecon:v:106:y:1991:i:2:p:531-55 is not listed on IDEAS
  6. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  7. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  8. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132.
  9. David, Paul A, 1985. "Clio and the Economics of QWERTY," American Economic Review, American Economic Association, vol. 75(2), pages 332-37, May.
  10. repec:oup:restud:v:58:y:1991:i:1:p:43-61 is not listed on IDEAS
  11. Robert C. Feenstra, 1992. "How Costly Is Protectionism?," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 159-178, Summer.
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