Abstract
We develop a necessary and a sufficient condition for an improvement in terms of trade to reduce welfare under a general setting, which can accommodate various types of market stucture and trade distortions. We also apply the conditions to two specific cases, viz export subsidies and the existence of monopoly in a non‐tradeable sector. It is found that a rise in price for an exportable commodity which is subsidized may well reduce welfare. Also, improvements in terms of trade may well harm the economy if there is a non‐tradeable monopoly sector.
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