| Abstract: | The theory of (tariff and exchange-rate) protection usually assumes that imports and domestic substitutes sell at the same price and that exceptions to the ‘law of one price’ are due to imperfect substitutability. This article discusses the implications for the modus operandi of protection of the divergence between the prices of imports and of their domestic substitutes. It argues that the extent of this divergence will depend on imperfect price flexibility as well as imperfect substitutability. Whereas under ‘flex-price’ conditions, protection in the first instance merely redistributes income and changes market shares, output and employment only with a lag, protection under ‘fix-price’ conditions immediately affects market shares and (subject to inventory changes) output and employment. |
