DUTY-FREE ZONE IN A HARRIS-TODARO ECONOMY: A NOTE

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We consider a small open Harris-Todaro economy with the rural sector consisting of a 'Duty-Free Zone' and a 'Non-Duty Free Zone'. Capital is non-shiftable between the urban sector and the rural sector, but perfectly shiftable between the two sub-sectors of the rural sector. A policy of expanding the Duty-free Zone though the reduction in import-duty on the intermediate goods used in that sector affects unemployment and national income; and the nature of the effects depends on the relative capital-intensity of the two sub-sectors of the rural sector. We get the opposite results when the tariff on the final product is reduced.

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