Chapter

International Trade

Chris Jones

in Applied Welfare Economics

Published in print May 2005 | ISBN: 9780199281978
Published online July 2005 | e-ISBN: 9780191602535 | DOI: http://dx.doi.org/10.1093/0199281971.003.0005
International Trade

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Welfare measures are examined in the presence of taxes and quantitative restrictions on international trade flows. Harberger (1968) used the shadow exchange rate to compute the shadow prices of fully traded goods by converting their foreign prices into domestic utility. The shadow and official exchange rates normally diverge when there are taxes and other distortions in domestic markets. However, traditional derivations of the shadow exchange rate accounted for tax distortions on international trade flows, but ignored other types of taxes and subsidies as well as distortions in non-traded goods markets. A more general measure of the shadow exchange rate is derived to account for these additional distortions under both fixed and floating exchange rate regimes. Also, the generalized Hatta (1977) decomposition is used to provide intuition for the famous Little and Mirrlees (1969) result for shadow pricing fully traded goods in small open economies. Then the domestic resource cost ratio is compared to the effective rate of protection. Both are widely used by international aid agencies to review the effects of trade policies in developing countries.

Keywords: choice of numeraire; export taxes; home-price consumption scheme; import quota; international trade; official exchange rate; shadow exchange rate; tariffs

Chapter.  13150 words.  Illustrated.

Subjects: Public Economics

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