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The gains from trade in a small monetary economy

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Listed:
  • George Darko
  • Richard Dusansky
  • Pankaj Maskara
  • Nadeem Naqvi

Abstract

In general equilibrium under constant returns to scale and perfect competition the normative theory of international trade is examined for a monetary, not a barter, economy. Persons exhibit flow demand for real balances just as they do for commodities because money provides well-being salient utility insofar as its content is desire fulfilment, satisfaction or usefulness. For such a monetary small open economy, an additional terms-of-trade effect or inflationary effect of a tariff is identified, which drives many unusual results including the sub-optimality of free trade, unless the exchange rate is flexible and the commodities and real balances are weakly separable.

Suggested Citation

  • George Darko & Richard Dusansky & Pankaj Maskara & Nadeem Naqvi, 2006. "The gains from trade in a small monetary economy," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(4), pages 403-430.
    • Handle: RePEc:taf:jitecd:v:15:y:2006:i:4:p:403-430
    DOI: 10.1080/09638190601037427
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    References listed on IDEAS

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