The gains from trade in a small monetary economy
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.
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Volume (Year): 15 (2006)
Issue (Month): 4 ()
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