Chapter 14 Tariff Policy and Foreign Economic Aid for the Economy with a Monopolistically Competitive Nontraded Industry and Capital Inflow

Abstract

Purpose – This chapter examines whether a small open economy in the presence of a nontraded good produced under a monopolistically competitive market and foreign capital inflow can raise its national welfare by adopting trade liberalization coupled with foreign economic aid.

Methodology/approach – The chapter employs a general equilibrium, comparative static analysis of a small open economy involving two factors and two industries.

Findings – It is shown that an import tariff can raise the welfare of a country or impoverish it, depending on the production and trade structures and preferences of the country, but foreign economic aid is always welfare enhancing. Thus, even when a tariff reduction reduces national welfare, the government still has an incentive to adopt the policy combination of trade liberalization and foreign economic aid.

Originality/value of paper – The results obtained explain a widely recognized fact that economic aid by developed donor countries, trade liberalization and capital market liberalization typically take place simultaneously in developing recipient countries.

Citation

Okawa, M. (2008), "Chapter 14 Tariff Policy and Foreign Economic Aid for the Economy with a Monopolistically Competitive Nontraded Industry and Capital Inflow", Tran-Nam, B., Van Long, N. and Tawada, M. (Ed.) Globalization and Emerging Issues in Trade Theory and Policy (Frontiers of Economics and Globalization, Vol. 5), Emerald Group Publishing Limited, Leeds, pp. 231-244. https://doi.org/10.1016/S1574-8715(08)05014-8