Terms of Trade Shocks and Domestic Prices under Tariffs and Quotas: A Note

Konstantine Gatsios

No 2593, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The paper develops a two-good, small country, general equilibrium trade model with endogenous labour supply, where trade is restricted by a tariff or an import quota. Within this framework, it is shown that, contrary to Anam (1989), under an import quota domestic and world prices may vary in the same direction. This is due to the possible positive employment effects of terms of trade shocks. In such a case, compared to fixed labour supply, variable labour supply is likely to make the domestic prices less sensitive to foreign price volatility.

Keywords: Import restrictions; Variable labour supply; Terms of trade (search for similar items in EconPapers)
JEL-codes: F10 F13 (search for similar items in EconPapers)
Date: 2000-10
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