NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Real Exchange Rate Adjustment and the Welfare Effects of Oil Price Decontrol

Paul R. Krugman

NBER Working Paper No. 658
Issued in April 1981
NBER Program(s):   ITI   IFM

Conventional analysis of the welfare effects of U.S. oil price regulation in the 1970's focuses on the deadweight losses in the oil market. This paper argues that such analysis substantially understates the benefits from decontrolling prices, because decontrol will lead to an improvement in the U.S. terms of trade with respect to other oil importing countries. A simple model of the relationship between oil decontrol and the terms of trade is developed, and the impact is calculated for plausible parameter values. The results suggest that the terms of trade benefits are several times larger than the benefits as conventionally measured.

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Document Object Identifier (DOI): 10.3386/w0658

Published: (Published as "Differences In Income Elasticities and Trends in Real Exchange Rates") European Economic Review, Vol. 33, no. 5 (1989):1031-1046.

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