Welfare Indexes with Interindustry Flows: Comment

Abstract

In a recent paper in this Journal (Vanek 1971) Professor Vanek generalizes the Meade type utility index to the case where interindustry flows subject to fixed coefficients are present. After deriving his results that show the change in welfare can be measured by changes in gross outputs weighted by nominal tariffs, Vanek states: My expectation was that the results expressing the change in social utility ought to contain some kind of a weighted sum of changes in gross outputs . . . weighted by effective rather than nominal divergences. If this had been the case, the use and construction of effective tariff rates could have been vindicated. Unfortunately, as our results seem to indicate, no such conclusions can be drawn (pp. 34849). This calls into question both an important theoretical justification for calculating effective rates of protection and the validity of considerable empirical work on estimating the losses due to tariff distortions.' First, we use a simple general equilibrium model2 to show that the effective rate of protection may in fact be used in correctly measuring welfare changes. This finding vindicates the use of effective rates. Second, a more direct method of evaluating costs of distortions has been established by Vanek which requires only a knowledge of nominal distortions and distortion-induced changes in traded commodities. In deriving his result, Vanek uses a closedeconomy model which is, strictly speaking, inappropriate to analyzing the costs of tariff interference. In this note his result is generalized to the open economy model. It is assumed that the preferences of the community are represented by a