It is well established in the case of a small country that the optimal tool for a given target is the one which is directly aimed at the target. For instance, production subsidy is the best policy for protecting a domestic industry. The theory must be, however, modified substantially from the viewpoint of an open economy with enough market power to affect its terms of trade. In this paper we reconsider the theory of optimal policies for given targets within the framework of a standard two-country general equilibrium model of international trade.
The purpose of this paper is to analyze the effect of conjectural variations on economic welfare, by using the model of intra-industry trade. So this paper develops a model of a two-sector economy trade (the one sector is perfectly competitive, the other is monopolistically competitive) with two factors of production, and introduces conjectural variations into the model. As a result, in terms of certain parameter values and conjectural variations, the level of economic welfare of open economy is lower than that of closed economy. This paper analyzes this result, and makes the characteristic of the model of intra-industry trade clear