WELFARE REDUCING TRADE AND OPTIMAL TRADE-POLICY

This paper shows that free trade reduces the welfare of a small countr y with unemployment unless the free trade price of the importable fall s below the autarky equivalent price. A decline in the price of the im portable from the autarky level not only improves the terms of trade b ut also reduces employment and production in the importable sector. A numerical example illustrates that the autarky equivalent price of the importable can be substantially lower than the autarky price. If an o ptimal tariff is used, however, restricted trade improves welfare abov e the autarky level. (C) 1998 Elsevier Science B.V.