Short-Run Trade Surplus Creation in a Two-Sector Setting

This study investigates the effect of the suppression of competition in the domestic non-tradable sector on a country’s trade balance in a small open economy. Using a two-sector model, this study demonstrates that the effect on the trade balance of such a suppression depends on the sector on which the policy is imposed. This result sharply contrasts with Yano’s result in a one-sector model demonstrating that such a policy unambiguously creates a trade surplus in the short run.