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Welfare Reducing Trade and Optimal Trade Policy

Author

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  • E. Kwan Choi
  • Hamid Beladi

Abstract

In contrast to some trade theorists' long-held beliefs, this study shows that free trade reduces the welfare of a small country with unemployment unless the free trade price of the importable falls below the autarky equivalent price. This study formulates a disequilibrium trade model with sticky money wages that has been generalized to fixed-price economies where output prices as well as wages are fixed, independent of excess demand or supply in the labor and goods markets. After describing the model and its solution, the authors discuss the implications of changing tariff rates on foreign products, construct a numerical example showing that their result is possible for many countries with unemployment, and analyze the issues of optimal tariff.

Suggested Citation

  • E. Kwan Choi & Hamid Beladi, 1998. "Welfare Reducing Trade and Optimal Trade Policy," Food and Agricultural Policy Research Institute (FAPRI) Publications (archive only) 98-wp196, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    • Handle: RePEc:ias:fpaper:98-wp196
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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.
    2. repec:bla:econom:v:60:y:1993:i:240:p:475-86 is not listed on IDEAS
    3. Batra, Ravi, 1992. "The Fallacy of Free Trade," Review of International Economics, Wiley Blackwell, vol. 1(1), pages 19-31, November.
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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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    Cited by:

    1. 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.
    2. 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.
    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. 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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