TITLE:
Consumption Tax, Nontraded Goods and Welfare
AUTHORS:
Wataru Johdo
KEYWORDS:
Consumption Tax; Nontraded Goods; Trade Openness; Small Open Economy; Welfare
JOURNAL NAME:
Theoretical Economics Letters,
Vol.3 No.5,
October
17,
2013
ABSTRACT: This paper studies the welfare effects of a consumption tax rise based on the two-sector small open economy model of Obstfeld and Rogoff (1995) and Lane (1997). The main findings of our analysis are that 1) in the case of free trade, the consumption tax rise has no effect on welfare, 2) when there is the nontraded goods sector, the consumption tax rise has a negative effect on welfare, and 3) the larger the share of nontraded goods in consumption is, the larger the negative welfare effect of consumption tax will be.