noteworthy. First, the revenue-redistribution scheme adopted by the government will affect the magnitude, and possibly even the sign of the comparative static results. If the tariff proceeds are redistributed to consumers, then the only effect of the tariff is a pure substitution effect in favor of the domestic good, so that the output effect of a tariff is necessarily expansionary. At the same time, the trade balance effect will be lower (but still positive). Second, the assumption that the exchange rate is fixed is crucial for the comparative static results. Suppose
The world model of merchandise trade as presently specified1 focuses primarily on the impact of levels of economic activity in the industrial countries on their foreign trade balances, although the effects of changes in relative prices are also considered. Raw material and fuel imports and transactions in manufactured goods are especially important in the trade of these countries, and the determinants of these flows, as well as those of agricultural goods, are quite distinct. As a result, the model distinguishes between these four types of commodity flows but pays particular attention to the determinants of trade in fuels, raw materials, and manufactured goods.
In a world of significant exchange rate variability, the problem of evaluating the impact of exchange rate changes on a country’s trade balance carries immediate operational relevance. Even those countries that continue to peg the value of their currencies find that frequent changes in the exchange rates of floating currencies affect the outlook for a substantial segment of their own exports and imports. For example, in 1977, countries that pegged their currencies to the U. S. dollar, the pound sterling, the French franc, the SDR, or some other currency composite still conducted roughly 40 per cent of their export trade with countries that either allowed their currencies to vary independently or did not fix their currencies to the same peg. On a global basis, trade between countries that fixed the value of their currencies in relation to one another accounted for less than one fifth of world exports in 1977.