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- W2555012011 abstract "TBA Extremely incomplete preliminary version, please do not quote! he former socialist countries of Europe had bilateral trade agreements with many Western countries. Some of those imposed the requirement of bilaterally balanced this was especially the case of trade between Finland and Soviet Union which also was more extensive (in relative terms) than for any other Western country, accounting at one point for more than 20 per cent of Finnish exports. This created a closed economy island, where the prices at which trade between the two countries takes place differed from the prices at the Western markets. In the case Finnish-Soviet Union a separate currency, the transfer-rouble was created and the financial transactions related to the bilateral trade were conducted through the Bank of Finland. Finnish firms were paid in dollars, but Russian firms obtained transfer-roubles which they could only use when trading with Finnish firms. The transfer-roubles were created by Finnish imports from Soviet-Union (mostly oil with world-market price). In Soviet-Union the transfer-roubles were allocated to firms according to the exchange protocol negotiated annually by the Finnish and Soviet governments specifying the quantitative targets for the bilateral trade in specific commodities. The system gave Finnish firms market power vis-a‘-vis Soviet partners as for the Finnish firms’ trade with Soviet firms was voluntary: they had the option of trading with Western firms, but Soviet firms had no choice but to trade with Finnish firms. This pushed the Finnish export prices to Soviet Union above the prices obtained in Western markets and produced aggregate rents earned by Finland. Nothing similar happened on the Finnish import side as most of Finnish imports from Soviet Union was oil priced at the world market price. For other goods Finnish firms had always the option of buying goods from Western markets and as trade with Soviet firms was voluntary the Soviet traders did not have any market power. The rents created by this trade certainly improved Finnish terms of trade and increased aggregate income. On the other side of the coin, the relative prices employed in the Finnish-Soviet trade differed from those prevailing in Western trade. In particular, the Finnish-Soviet trade could sustain Finnish production for which no Western markets existed, and thus create potential inefficiency in the economy. The purpose of this paper is to use basic trade theory to illustrate the source, if any, of the inefficiency the system created. I will build a stylized model of the Finnish-Soviet trade to highlight the trade-off between rents and inefficiency with implications also in factor markets. Thereafter I look (theoretically) at the welfare effects of opening of trade, the abolition of the closed economy island (which took place almost overnight in 1991), and try to xxxx" @default.
- W2555012011 created "2016-11-30" @default.
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- W2555012011 date "2013-01-01" @default.
- W2555012011 modified "2023-09-25" @default.
- W2555012011 title "Bilaterally Constrained Trade Balance and Welfare" @default.
- W2555012011 hasPublicationYear "2013" @default.
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