Terms of Trade and Welfare for a Developing Economy with an Imperfectly Competitive Sector

Abstract

The effect of terms of trade economy on the welfare of a small open economy is analyzed. It exports a homogeneous good and imports some brands of the differentiated good. It also produces some brands of the differentiated good which are not traded. A term of trade deterioration causes resources to move to the non-traded, import-competing sector. The economy's income rises and the price index for the differentiated good falls, resulting in higher welfare. This accords well with the experience of developing economies of East and Southeast Asia.

JEL Classification: F0, F2, F4