On the Conditions that Preclude the Existence of the Lerner Paradox and the Metzler Paradox

18 Pages Posted: 16 Feb 2006

See all articles by Koichi Hamada

Koichi Hamada

Yale University - Department of Economics

Masahiro Endoh

Keio University - Faculty of Business and Commerce

Date Written: February 2006

Abstract

The Lerner paradox is the possibility that a tariff on an import good might worsen a country's terms of trade, and the Metzler paradox is the possibility that a tariff on an import good might reduce a country's import price. In a general equilibrium framework with multiple goods, this paper shows that the combination of the invertibility of the Slutsky matrix for the world economy and its similarity across countries will preclude both of the paradoxes, and that the combination of the gross-substitutes assumption for the world demand and the substitute assumption for the demand of an import country property of goods will preclude the Lerner paradox. A modified condition for the Slutsky matrix combined with the gross substitute for the world demand will do the same for the Metzler paradox. A concept of non-surpassed diagonal is used in deriving the result.

Keywords: Lerner paradox, Metzler paradox, tariffs, terms of trade, gross substitutes, dominant diagonal matrix

JEL Classification: C20, F02, F11

Suggested Citation

Hamada, Koichi and Endoh, Masahiro, On the Conditions that Preclude the Existence of the Lerner Paradox and the Metzler Paradox (February 2006). Yale University Economic Growth Center Discussion Paper No. 931, Available at SSRN: https://ssrn.com/abstract=885372

Koichi Hamada (Contact Author)

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Masahiro Endoh

Keio University - Faculty of Business and Commerce ( email )

2-15-45 Mita
Minato-ku
Tokyo 108-8345
Japan
(81)-3-5427-1277 (Phone)
(81)-3-5427-1578 (Fax)

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