Does Trade liberalization benefit young and old alike?

In an overlapping generations model, capital and labor produce two tradable goods. A kleptocratic government spends the tariff revenue. Trade liberalization benefits the retired generation if and only if the relative price of the capital-intensive good rises. Starting from autarky, a small liberalization benefits subsequent generations if and only if it hurts the retired one, a result reminiscent of the Stolper-Samuelson theorem. However, the terms-of-trade effect means a large liberalization may simultaneously raise the welfare of all generations.

Duke Scholars

Author Edward Tower Economics