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Welfare Reducing Trade and Optimal Trade Policy

Author

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  • Choi, E. Kwan
  • Beladi, Hamid

Abstract

This paper shows that free trade reduces the welfare of a small country with unemployment unless the free trade price if the importable falls below the autarky equivalent price. A decline in the price of the importable from the autarky level not only improves the terms of trade but also reduces employment and production in the importable sector. A numerical example illustrates that the autarky equivalent price of the importable can be substantially lower than the autarky price. If an optimal tariff is used, however, restricted trade improves welfare above the autarky level.

Suggested Citation

  • Choi, E. Kwan & Beladi, Hamid, 1998. "Welfare Reducing Trade and Optimal Trade Policy," Hebrew University of Jerusalem Archive 18513, Hebrew University of Jerusalem.
    • Handle: RePEc:ags:hebarc:18513
    DOI: 10.22004/ag.econ.18513
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    File URL: https://ageconsearch.umn.edu/record/18513/files/wp980196.pdf
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    References listed on IDEAS

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    1. Murray C. Kemp, 1968. "Some Issues In The Analysis Of Trade Gains," Oxford Economic Papers, Oxford University Press, vol. 20(2), pages 149-161.
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    7. Choi, E. Kwan & Beladi, Hamid, 1993. "Optimal Trade Policies for a Small Open Economy," Staff General Research Papers Archive 672, Iowa State University, Department of Economics.
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    2. Yoshiyasu Ono, 2010. "Trade Policy, Exchange Rate Adjustment and Unemployment," Chapters, in: Noel Gaston & Ahmed M. Khalid (ed.), Globalization and Economic Integration, chapter 7, Edward Elgar Publishing.
    3. Chi-Chur Chao & Chong Yip, 2001. "Non-traded goods and optimal trade policy in a cash-in-advance economy," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 10(1), pages 23-37.
    4. Yoshiyasu Ono, 2014. "International Economic Interdependence and Exchange-rate Adjustment under Persistent Stagnation," The Japanese Economic Review, Japanese Economic Association, vol. 65(1), pages 70-92, March.
    5. Chi-Chur Chao & Chong Yip, 2000. "Urban unemployment and optimal trade policy in a cash-in-advance economy," Journal of Economics, Springer, vol. 71(1), pages 59-77, February.

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