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The second term on the RHS, [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII], is novel and represents the monetary effect of a radial reduction of imports tariffs on welfare; it is due to the asymmetric cash requirements in the exportable and the importable sectors.
In particular, if the exportable good requires more cash balances per unit of value than the importable goods, that is, [[phi].
x]) denotes how much more or less cash the consumer spends on importables relative to that spent on the exportable good or, alternatively, the mark-up over the relative prices of importables q faced by a consumer.
A sufficient condition for a welfare improvement, following a reduction in tariffs, is that the cash requirement ratio in the exportable sector ([[phi].
Equations 10 and 11 indicate that this result is valid even in the presence of production taxes and asymmetric cash requirements between the exportable and importable goods.
Hence, we are left with the two conflicting effects that were mentioned in the introduction: namely, a reduction of import tariffs increases the output of the exportable good and thus the value of exports (which is equal to the value imports at world prices), while a welfare increase (due to lower tariffs) increases the demand for the exportable good and thus reduces exports.
In studies where the export good is used as the numeraire the price of importables relative to that of exportables decreases by the same amount (with the price of exportables being normalized to one).
When the export good is used as the numeraire, the change in the price of importables relative to exportables results only from a change in some external trade policy.
In the following sections, we will explicitly consider the effects of trade liberalization of importables on the true protection of exportables, on wages, and on worker welfare.
m]) on the true rate of protection of exportables is derived explicitly.
For the present purpose, Equation (7) depicts the effect on true protection of exportables.
n] refer to the slope of labor demand curve in the importables, exportables and nontradable sector respectively at the equilibrium point.