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The gains from trade in a small monetary economy

Author

Listed:
  • George Darko
  • Richard Dusansky
  • Pankaj Maskara
  • Nadeem Naqvi

Abstract

In general equilibrium under constant returns to scale and perfect competition the normative theory of international trade is examined for a monetary, not a barter, economy. Persons exhibit flow demand for real balances just as they do for commodities because money provides well-being salient utility insofar as its content is desire fulfilment, satisfaction or usefulness. For such a monetary small open economy, an additional terms-of-trade effect or inflationary effect of a tariff is identified, which drives many unusual results including the sub-optimality of free trade, unless the exchange rate is flexible and the commodities and real balances are weakly separable.

Suggested Citation

  • George Darko & Richard Dusansky & Pankaj Maskara & Nadeem Naqvi, 2006. "The gains from trade in a small monetary economy," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(4), pages 403-430.
    • Handle: RePEc:taf:jitecd:v:15:y:2006:i:4:p:403-430
    DOI: 10.1080/09638190601037427
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    References listed on IDEAS

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    1. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
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    7. Dusansky, Richard, 1989. "The Demand for Money and Goods in the Theory of Consumer Choice with Money," American Economic Review, American Economic Association, vol. 79(4), pages 895-901, September.
    8. Neary, Peter & Ruane, Frances P, 1988. "International Capital Mobility, Shadow Prices, and the Cost of Protection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(4), pages 571-585, November.
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    10. F. H. Hahn, 1959. "The Balance of Payments in a Monetary Economy," Review of Economic Studies, Oxford University Press, vol. 26(2), pages 110-125.
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