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Trade Reform with a Government Budget Constraint

  • James E. Anderson

    ()

    (Boston College)

The theory of trade reform typically is based on a passive government budget constraint, in which changes in tariff revenue are costlessly offset by lump sum transfers. This paper offers a general framework for trade reform when the government budget constraint is active, such that tariff revenue cuts must be offset by public good decreases or other tax increases. The trade reform and public finance literatures are integrated to develop some useful and simple new expressions characterizing welfare improving trade reform. The expressions are operational with Computable General Equilibrium models. The theoretical analysis and an application to Korean data in 1963 cast doubt of the desirability of tariff cuts in convex competitive economies with active government budget constraints.

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File URL: http://fmwww.bc.edu/EC-P/wp348.pdf
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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 348..

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Length: 31 pages
Date of creation: 01 Jan 1997
Date of revision:
Publication status: published in Trade Policy and the Pacific Rim, J. Piggott and A. Woodland, eds., Macmillan for the International Economic Association, 1999.
Handle: RePEc:boc:bocoec:348
Contact details of provider: Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Phone: 617-552-3670
Fax: +1-617-552-2308
Web page: http://fmwww.bc.edu/EC/
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  1. Lloyd, P. J., 1974. "A more general theory of price distortions in open economies," Journal of International Economics, Elsevier, vol. 4(4), pages 365-386, November.
  2. Bruno, Michael, 1972. "Market Distortions and Gradual Reform," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 373-83, July.
  3. Lopez, Ramon & Panagariya, Arvind, 1992. "On the Theory of Piecemeal Tariff Reform: The Case of Pure Imported Intermediate Inputs," American Economic Review, American Economic Association, vol. 82(3), pages 615-25, June.
  4. Devarajan, Shantayanan & Squire, Lyn & Suthiwart-Narueput, Sethaput, 1995. "Reviving project appraisal at the World Bank," Policy Research Working Paper Series 1496, The World Bank.
  5. Grossman, Gene & Helpman, Elhanan, 1993. "Protection for Sale," CEPR Discussion Papers 827, C.E.P.R. Discussion Papers.
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  7. Hatta, Tatsuo, 1977. "A Theory of Piecemeal Policy Recommendations," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 1-21, February.
  8. Diewert, W E & Turunen-Red, A H & Woodland, A D, 1989. "Productivity- and Pareto-Improving Changes in Taxes and Tariffs," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 199-215, April.
  9. Rod Falvey, 1994. "Revenue enhancing tariff reform," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(1), pages 175-190, March.
  10. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Abe, Kenzo, 1992. "Tariff Reform in a Small Open Economy with Public Production," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 209-22, February.
  12. Squire, Lyn, 1989. "Project evaluation in theory and practice," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 21, pages 1093-1137 Elsevier.
  13. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-38, March.
  14. Anderson, James E. & Young, Leslie, 1992. "Optimal taxation and debt in an open economy," Journal of Public Economics, Elsevier, vol. 47(1), pages 27-57, February.
  15. Bertrand, Trent J & Vanek, Jaroslav, 1971. "The Theory of Tariffs, Taxes, and Subsidies: Some Aspects of the Second Best," American Economic Review, American Economic Association, vol. 61(5), pages 925-31, December.
  16. James E. Anderson & Will Martin, 1996. "The Welfare Analysis of Fiscal Policy: A Simple Unified Account," Boston College Working Papers in Economics 316., Boston College Department of Economics.
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