DP2593 Terms of Trade Shocks and Domestic Prices under Tariffs and Quotas: A Note

Author(s): Konstantine Gatsios
Publication Date: October 2000
Keyword(s): Import Restrictions, Terms of Trade, Variable Labour Supply
JEL(s): F10, F13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2593

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.