Technical Progress, Tariffs and Welfare in a Model of Monopolistic Competition

This paper develops a model of trade, with monopolistic competition, between a raw material rich less developed country (LDC) and a technically advanced developed country (DC). It turns out that while many of the neoclassical conclusions regarding the effects of technical progress and tariffs on the terms of trade remain valid, the welfare conclusions are radically different. Our results show that decline in the terms of trade caused by technical progress in DC does not depend on the Hicksian bias of such technical progress. It also turns out that technical progress in DC may harm the LDC under some circumstances. Finally, from the welfare point of view, the more unequal the distribution of income between the DC and the LDC, the larger the benefits accruing to the latter from a tariff.