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Metzler paradox and home market effects in presence of internationally mobile capital and non-traded goods

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  • Biswas, Rajit

Abstract

In models of monopolistic competition with a single factor of production, imposition of tariff can lead (paradoxically) to a drop in the aggregate price index of the import competing sector. The present model first introduces an internationally mobile capital in such a set up. It is found that tariff attracts a capital inflow into the protected sector, which results in a reduction the price index. Interestingly, the tariff protected importing sector expands, although the domestic price index falls. However if there is a homogeneous non-traded good, along with the mobile capital, effect on the price index of the import competing sector becomes ambiguous. Further, the number of varieties produced by the import competing sector can actually fall and the import competing sector may actually contract.

Suggested Citation

  • Biswas, Rajit, 2014. "Metzler paradox and home market effects in presence of internationally mobile capital and non-traded goods," MPRA Paper 56335, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:56335
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Home market effects; non traded good; monopolistic competition; tariffs;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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