NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Tariffs, the Real Exchange Rate and the Terms of Trade: On Two Popular Propositions in International Economics

Sebastian Edwards, Sweder van Wijnbergen

NBER Working Paper No. 2365 (Also Reprint No. r1196)
Issued in June 1989
NBER Program(s):   ITI   IFM

In this paper we investigate the relation between tariff changes, terms of trade changes and the equilibrium real exchange rate. For this purpose we use two models of a small open economy: (1) a three goods version of the Ricardo-Viner model; and (2) a three goods model with full intersectoral factor mobility. We show that, in general, it is not possible to know how the equilibrium real exchange rate will respond to these two disturbances. Moreover, we show that the traditional wisdom that establishes that a tariff hike will always result in a real appreciation, while a terms of trade worsening will generate an equilibrium real depreciation, is incorrect.

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Published: Oxford Economic Papers, Vol. 39, pp. 458-464, (1987).

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