Trade Imbalance and Domestic Market Competition Policy

Abstract

This study investigates the effect of a country's suppression of competition in its market for nontradables. It assumes that the initial equilibrium is stationary and demonstrates that if competition is suppressed in a small country, the country's trade surplus increases in the short run. In the large country case, the same change creates an excess demand for future tradables and affects the relative price between present and future tradables. Using a two‐country model, the study shows that this price change redistributes real wealth from the country with a trade deficit to the country with a trade surplus.