The Effects of Foreign Trade Liberalization on GovernmentExpenditure and Private Consumption In IRAN(Optimal Control Method)

Using the Optimum control procedure, the present paper is concerned with the effects of trade liberalization on both government and private expenditures in Iran. An appropriate analytical consisting of ten equations is specified throgh which significant estimation results are obtained, using econometric method over the 1959-86 period. The model is utilized to explore how any change in control variables such as the overage rate of tariffs, government revenues and money supply can affect the optimally controled path of state variables like private expenditures, government budget, and GDP. The results obtained, 012 the one hand, reveal the fact that the policy of trade liberalization (such as a reduction in tariffs) reduces government spendings (or reduces government budget deficit), but it is not likely to lead to a possible budget balance. This is because liberalization generally lowers government revenues as well. On the other hand, although a reduction in tariffs may result in a gap between real and expected valuse of private expenditures in the short-ron, this gap is likely to disappear in the long-run