Tariffs, The Terms of Trade and Domestic Prices in a Monetary Economy: A Further Analysis
The purpose of this note is to re-examine the recent Batra-Ramachandran (B-R, 1980) investigation of the effects of tariffs in a monetary economy. In particular, we show that under flexible exchange rates the Metzler condition is necessary and sufficient for avoiding the Metzler tariff paradox, as in the usual barter model, thus extending B-R's discussion. Furthermore, we show that the Metzler condition is sufficient for both a tariff-induced appreciation of the exchange rate (under flexible exchange rates) and a tariff-induced payments surplus (under fixed exchange rates). These results can be contrasted with B-R's negative contention that such effects are "indeterminate". This note thus reconciles B-R's results with those we reported elsewhere (Anderson and Takayama 1978).
Metlzer’s Paradox and the Optimum Tariff in a Monetary Economy
We augment the standard two country, two-commodity and two-factor trade model by allowing for money to exist as an additional asset. We find that it is possi - ble for an increase in the domestic tariff to worsen the terms of trade if the importable sector is severely distorted by the existence of money. Moreover, the Metzler condition is no longer both necessary and sufficient to rule out the Metzler paradox. Finally, we show that the conventional formula for the optimum tariff, derived in barter trade models, has a downward (upward) bias if money is more (less) efficacious in the importable sector. “In the real world there is no simple dividing line between trade and monetary issues.” Krugman and Obstfeld [1994], p. 8.
Stability Conditions in International Trade: A General Equilibrium Analysis
DEVELOPMENT OF the theory of international trade has relied heavily on general equilibrium forms of analysis, as exemplified in simple models by use of reciprocal demand curves and transformation schedules. The problem of stability in international trade and the closely related problem of the effect of devaluation on the balance of payments have generally been analyzed, however, by partial equilibrium techniques. The resultant stability conditions in models which disregard the income effects of employment changes involve complicated expressions of demand and supply elasticities for imports and exports. In this article I shall analyze the problem by general equilibrium methods to show that the stability conditions can be stated in a simple form. A general equilibrium expression for stability that isolates the pure demand from the pure supply effects of price changes is developed in the first section of the paper. In Section 2, I shall make explicit the relationship between the stability analysis and two alternative techniques of investigating the effect of changes in exchange rates on the balance of trade. Finally, in Section 3, I compare the general equilibrium results with the familiar Metzler-Robinson-Bickerdike partial equilibrium expression and point out wherein the latter is deficient. The two country, two commodity, purely competitive model of trade with full employment guaranteed by flexible prices is employed throughout the paper.