In particular, if the exportable sector is more liquidity constrained, that is, [[phi].
In particular, if the cash requirement ratio in the importable sector is higher than that in the exportable ([delta] > 0), then lowering taxes will decrease the cost of importables relative to that of the exportable good and hence will lead to an increase in imports; in other words, the two effects will reinforce each other.
A sufficient condition for the welfare superiority of tariff-only reforms is that the cash requirement ratio in the exportable sector ([[phi].
In addition, this reform strategy is welfare enhancing since it improves consumption efficiency by reducing excessive consumption of the exportable goods.
Sufficient conditions for an increase in welfare are (i) that the cash requirement ratio in the exportable sector is lower than that in the importable and (ii) all exported goods are burdened with a net consumption subsidy.
For the sake of brevity, we analyze only the case of a reduction in the tariff when there are only two tradeable goods, an exportable, which is indexed with "0" and is used as the numeraire good, and an importable, which is indexed with "1.
The greater the elasticity of demand of nontraded goods with respect to the price of importables relative to price of exportables.
With the fall in price of importables, following trade liberalization, there is increased demand for importable and fall in demand for nontradeables and exportables (depending on substitutional possibilities between sectors and assuming that the income effect does not outweigh the substitution effect).
The fact that the true protection to exportables increases without any direct intervention in that sector, and that the change in the rate of true protection to importables arises not only from a change in the absolute level of protection but also from the change in price of nontraded goods, can now be exploited in analyzing the effects of trade liberalization.
Proposition 1: For any given reduction in the true protection of importables there is a greater increase in the true protection of exportables.
1) The greater the cross price elasticity of demand between importables and nontradeables relative to that between exportables and nontradeables.
In previous studies of the effects of trade liberalization on the labor market, where the export good is the numeraire, the short-run effects of trade liberalization are such that wages fall in terms of the price of exportables in two sector models, and in terms of prices of exportables and nontraded goods in three sector models [Edwards, 1988].