Trade and allocation of resources in a distorted economy

Abstract

This paper has tried to analyse the effects of a reduction of customs duties on the Norwegian economy. Traditional international trade theory usually studies production and allocation effects of trade in a two commodities, two factors of production world where everything behaves in accordance with the rules of perfect competition. This paper has, by contrast, tried to study international trade problems within a multisector model assuming distortions in the factor market in the sense that capital has been considered immobile between sectors and wages fixed. Given the distortions assumed in this paper, and also assuming full employment, employment and production effects in the different sectors, due to customs duties reductions, have been estimated. Price changes in sectors sheltered from foreign competition have also been studied. These sectors have been assumed to employ those becoming unemployed in the import- competing industries, due to a customs duties reduction.