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Metzler paradox and home market effects in presence of internationally mobile capital and non-traded goods

Biswas, Rajit (2014): Metzler paradox and home market effects in presence of internationally mobile capital and non-traded goods.

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Abstract

In models of monopolistic competition with a single factor of production, imposition of tariff can lead (paradoxically) to a drop in the aggregate price index of the import competing sector. The present model first introduces an internationally mobile capital in such a set up. It is found that tariff attracts a capital inflow into the protected sector, which results in a reduction the price index. Interestingly, the tariff protected importing sector expands, although the domestic price index falls. However if there is a homogeneous non-traded good, along with the mobile capital, effect on the price index of the import competing sector becomes ambiguous. Further, the number of varieties produced by the import competing sector can actually fall and the import competing sector may actually contract.

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