Chapter seven: Fixed exchange rate and import taxation and the surplus under rationing

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Under this regime, a change in the agricultural export taxation will not alter the exchange rate, but instead the implicit tariff on agricultural imports, in order to keep the external trade balance constant. The question is whether this policy generates more surplus compared to the flexible exchange rate regime.

Table 14 indicates the percent response of several variables (the same as those indicated in Table 9), to a 10 percent increase in the export tax rate, for the 20 stylized economies analyzed earlier, under this regime. Comparing the figures of Table 14 with those of Table 9, which indicate the responses under a flexible exchange rate regime several important points emerge.

First the welfare of workers is reduced considerably more under the rationing regime A_r compared to the flexible exchange rate regime A_c. The volume of exports as well as the volume of imports decrease much more under this regime. The latter effect is due to the fact that the implicit import tariff increases by more than the increase in the nominal exchange rate under regime A_c. The intersectoral shifts in production between agriculture and non-agriculture are substantially larger, resulting in larger declines in agricultural production, coupled with larger increases in non-agricultural production.

Interestingly GDP measured at world prices increases. Recall from Appendix B (re. equation B.36) that the economy's GDP at world prices and exchange rate e is

(7.1)

Table 13 Percent changes in surplus in response to a 10 percent increase in the rate of export taxation for economy type 12

Table 14 Percent response to a 10 percent increase in the export tax rate under import rationing

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