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Tariffs, The Real Exchange Rate and the Terms of Trade: On Two Popular Propositions in International Economics

  • Edwards, Sebastian
  • van Wijnbergen, Sweder

In this paper we investigate the relation between tariff changes, terms of trade changes and the equilibrium real exchange rate. For this purpose we use two models of a small open economy: (1) a three goods version of the Ricardo-Viner model; and (2) a three goods model with full intersectoral factor mobility. We show that, in general, it is not possible to know how the equilibrium real exchange rate will respond to these two disturbances. Moreover, we show that the traditional wisdom that establishes that a tariff hike will always result in a real appreciation, while a terms of trade worsening will generate an equilibrium real depreciation, is incorrect.

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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 39 (1987)
Issue (Month): 3 (September)
Pages: 458-64

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Handle: RePEc:oup:oxecpp:v:39:y:1987:i:3:p:458-64
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  1. Neary, J Peter, 1985. "International Factor Mobility, Minimum Wage Rates, and Factor-Price Equalization: A Synthesis," The Quarterly Journal of Economics, MIT Press, vol. 100(3), pages 551-70, August.
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