Abstract
This note points out an error in Lopez and Rodrick's (LR) analysis of the effects of changes in tariffs on imported intermediate inputs on welfare, the real exchange rate, and the trade balance in a small open economy. It shows that the welfare effect depends on an output-composition effect (which was ignored by LR), in addition to the standard distortion-magnification effect identified by LR. Taking account of this output-composition effect affects the rest of LR's comparative statics results, notably relating to the real exchange rate and the trade balance.
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