A DYNAMIC MODEL OF TOURISM, EMPLOYMENT AND WELFARE: THE CASE OF HONG KONG

Abstract.  The present paper uses a dynamic open-economy model with wage indexation to examine the impact of tourism on employment and welfare. Both short-run and long-run situations are analysed. It is well known that tourism converts non-traded goods into tradable goods. An increase in the demand for a non-traded good raises its relative price, which results in an expansion of the non-traded sector at the expense of the traded goods sector. This output shift raises labour employment in the short run. However, in the long run, the higher relative price leads to higher wages, resulting in a negative impact on labour employment. If the output effect is dominant, the expansion in tourism raises employment and welfare. However, under realistic conditions tourism may lower both labour employment and welfare due to rising costs. These results are demonstrated by simulating a dynamic model for the case of Hong Kong.     

The Dependent-Economy Model With Both Traded and Nontraded Capital Goods*

Dynamic versions of the dependent-economy model have been criticized for arbitrarily assuming that capital is either tradable or nontradable, and for choosing either the traded or nontraded sector to be capital intensive. Our model incorporates both types of capital and shows that the relative sectoral intensity of nontraded capital determines the dynamic adjustment of the relative price of nontradables. When the traded sector is intensive in nontraded capital, the saddlepath is flat. When the nontraded sector is intensive in nontraded capital, the saddlepath is negatively sloped. the relative sectoral intensity of traded capital primarily affects current-account dynamics.     

Skilled–unskilled wage inequality,product variety,public input and increasing returns: A static general equilibrium analysis

The paper develops a four sector small open economy model with two traded final good sectors, a public intermediate good producing sector and a nontraded good sector producing varieties of intermediate goods. There are three primary factors: capital, skilled labour and unskilled labour. Industrial sector producing a traded good uses capital, intermediate goods and skilled labour as inputs. Intermediate goods producing sector also uses capital and skilled labour. Public input producing sector and the agricultural sector producing the other traded good use capital and unskilled labour as inputs. It is shown that, if production technologies are the same for the agricultural sector and the public input producing sector and if the scale elasticity of output is very low, then an increase in capital stock (unskilled labour endowment) raises (lowers) the skilled–unskilled wage ratio. However, an increase in skilled labour endowment does not produce any unambiguous effect. On the other hand, an increase in the tax rate on industrial output and/or an increase in the price of the agricultural product, armed with the same set of assumptions, lowers the skilled–unskilled wage ratio.     

Endogenous Growth in a Dependent Economy with Traded and Nontraded Capital

The equilibrium growth path for this economy depends upon the relative sectoral capital intensities of the two production functions. If the nontruded sector is relatively intensive in traded capital , both the relative price of nontraded output and the price of installed capital always remain at their respective steady-state levels. Traded capital and aggregate wealth are always on their respective steady-state growth paths. Nontraded capital undergoes transitional dynamics, ultimately converging to the growth rate of traded capital and an equilibrium ratio of traded to nontraded capital. If the sectoral intensities are reversed, both asset prices will follow transitional adjustment paths.     

Skilled–unskilled wage inequality,nontraded good and endogenous supply of skilled labour: A theoretical analysis

The paper develops a static four sector competitive general equilibrium model of a small open economy in which skilled labour is endogenously produced by the education sector and is mobile between a traded good sector and a nontraded good sector. Capital is also perfectly mobile among the education sector, skilled labour using traded good sector and the nontraded good sector. However, land and unskilled labour are specific to another traded good sector. We analyse the effects of change in different factor endowments and reduction in tariff rate on skilled–unskilled wage inequality. We find that the effect of a change in different parameters on wage inequality depends on the factor intensity ranking between two skilled labour using sectors and on the relative strength of the marginal effects on demand for and supply of nontraded final good. We also analyse the effects of changes in different parameters on the supply of skilled labour.     

Terms of Trade and Welfare for a Developing Economy with an Imperfectly Competitive Sector

The effect of terms of trade on the welfare of a small open economy is analyzed. It exports a homogeneous good and imports some brands of a differentiated good. It also produces some brands of the differentiated good which are not traded. A terms-of-trade deterioration causes resources to move to the nontraded, import-competing sector. The economy's income rises and the price index for the differentiated good falls, resulting in higher welfare. This accords well with the experience of developing economies of East and Southeast Asia.     

Monetary Shocks and Real Exchange Rate Dynamics: a Reappraisal

This paper proposes a two‐country general‐equilibrium model incorporating a tradable sector with pricing‐to‐market as well as a nontradable sector. In that case, real exchange rate fluctuations arise from two sources: changes in the relative price of traded goods, that exemplify deviations from the law of one price, and movements in the relative price of traded to nontraded goods across countries. Our framework sheds light on the propagation mechanisms through which monetary shocks affect the real exchange rate. More specifically, the two components respond in opposite directions to monetary disturbances, which is consistent with data. Besides, the introduction of nontraded goods does not alter the predictive power of monetary shocks because the presence of nontraded goods magnifies the response of the deviation from the law of one price.     

Traded and Nontraded Goods and Real Wages

The paper explains most, if not all, observations made by the empirical literature regarding the behavior of skilled and unskilled real wages in the United States, especially those since 1980. Generalizing the Stopler–Samuelson theorem, the authors show that the nontraded sector is critical to explaining the effects of changes in the price of traded goods on relative and absolute wages. Factor‐intensities play their role as in the traditional Stolper–Samuelson model, but the output of the nontraded sector matters as well. Specifically, freer trade benefits capital and hurts both the skilled and unskilled labor if the import as well as the nontraded sectors contract. This is a new result to the literature on Stolper–Samuelson issues.     

International capital and nontraded goods in the long run

The present paper develops the comparative static properties of a small open economy which produces both traded goods and nontraded goods, and is a price taker in the international market for productive capital. Assumptions of full employment, competitive markets, and international mobility of productive cap ital input capture a long run horizon. Comparative static results associated with the wage, labor, and the price of the nontraded good are independent of factor intensity, factor substitution, and demand for the nontraded good. A tax on the traded good and a capital subsidy together raise national income and the real wage.     

Sector specific foreign investment,labour inflow,economies of scale and welfare

This paper argues that the impact of foreign investment on welfare depends on the sector that attracts the investment and certain characteristics of the economy. It is shown that, as long as the intermediate good is non-traded, foreign investment in a sector that is subject to economies of scale increases welfare by increasing the size of the intermediate good sector. On the other hand, foreign investment in a sector that is subject to constant returns to scale decreases welfare by decreasing the size of the intermediate good sector. The impact of foreign investment (in either sector) on welfare depends on relative factor intensities when the intermediate good is traded.     

International migration,remittances and real incomes: effects on the source country

"This article deals with the impact of remittances from emigrants on real incomes for different groups in their country of origin in a two-by-two model with one traded and one nontraded good. It is shown that emigration does not necessarily raise the real income of the emigrants themselves. If the traded good is capital intensive, nonmigrant workers gain and capitalists lose, whereas if it is labor intensive, the outcome depends on what happens to the price of the nontraded good. The result of a rise is that capitalists gain and workers lose, while a fall has the opposite effect."     

Welfare‐Worsening Aid Flows To Small Countries: The Role of Nontraded Goods

This paper presents the circumstances under which foreign aid can immiserize a small, tariff‐distorted economy, highlighting the role played by the nontraded sector in generating this outcome. An inflow of aid, provided in the form of an increase in the capital stock, can reduce real income of a small, tariff‐distorted economy if: (i) the inflow results in an increase in the price of the nontraded good and the nontraded good and imports are sufficiently strong complements in demand; or (ii) if the inflow leads to a reduction in the price of the nontraded good and the nontraded good and imports are substitutes in demand, provided the degree of substitutability is not too large.     

Why Free Trade May Hurt Developing Countries

This paper builds a general equilibrium trade model where a country produces two traded goods and one nontraded public consumption good. The government finances the provision of the public good by taxing the incomes of factors of production, and/or by imposing tariffs. Within this framework, the paper (i) shows that a small tariff or an income tax improves the country's welfare if there is an undersupply of public good, and (ii) identifies the circumstances in which an improvement in the country's terms of trade may reduce its welfare, and free trade can be inferior to autarky. A terms of trade improvement, or the movement from autarky to free trade, definitely improves the country's welfare if the government imposes a tariff that leaves the domestic relative price of the imported good unchanged.     

Wage indexation,migration, and unemployment

This article sets up a two-goods model with wage indexation and migrants. A dual labor market is introduced where the domestic workers receive an indexed wage while migrants receive a market-determined wage. The traded sector may be assumed to be unionized while the non-traded goods sector is non-unionized giving rise to flexible wages. This provides an example of segmentation and wage indexation. The wage indexation creates unemployment in the traded sector and the segmentation allows this unemployment to persist. The main results obtained are: sector-specific migration of labor may raise domestic welfare, while with capital accumulation such migration necessarily raises the relative price of the non-traded goods, leading to structural adjustment.     

INTERNATIONAL FACTOR MOBILITY,NONTRADED GOODS AND TARIFF REFORM*

Within models of traded and nontraded goods, that ignore international factor mobility, the literature on tariff reform has established sufficient conditions under which a policy that reduces (increases) the highest (lowest) tariff to the level of the second highest (lowest) rate, or a policy that moves proportionally all tariffs to a given number improves welfare. The present paper generalizes previous studies by introducing perfect international capital mobility. It demonstrates that if all goods are normal in consumption and the nontraded good markets are locally Walras stable, then a reform policy that reduces (increases) the highest (lowest) tariff to the level of the next highest (lowest) rate improves welfare if (i) the good with the highest (lowest) tariff rate is a net substitute to all other traded goods, and (ii) the nontraded goods are net substitutes to all other goods. Second, a policy reform that moves all tariffs to a given number is always welfare improving.     

Real exchange rate fluctuations,wage stickiness and tradability

When we classify factors of production by their tradability, the relative wage of nontraded labour influences the real exchange rate through the relative cost of distribution services. We confirm this prediction using monthly data on the sector‐level US–Canada real exchange rate and the relative wage of service‐producing labour. The relative wage accounts for 40% of the variability of the real exchange rate at a one‐month horizon. Furthermore, when we use the effective nontraded labour content to classify goods into nontraded and traded ones, the variability of the price of the nontraded‐goods basket accounts for more than half of the variability of the real exchange rate.     

Sudden stops,sectoral reallocations,and the real exchange rate

A sudden stop of capital flows into a developing country tends to be followed by a rapid switch from trade deficits to surpluses, a depreciation of the real exchange rate, and decreases in output and total factor productivity. Substantial reallocation takes place from the nontraded sector to the traded sector. We construct a multisector growth model, calibrate it to the Mexican economy, and use it to analyze Mexico's 1994–95 crisis. When subjected to a sudden stop, the model accounts for the trade balance reversal and the real exchange rate depreciation, but it cannot account for the decreases in GDP and TFP. Extending the model to include labor frictions and variable capital utilization, we still find that it cannot quantitatively account for the dynamics of output and productivity without losing the ability to account for the movements of other variables.     

UNDERSTANDING REAL EXCHANGE RATE MOVEMENTS WITH TRADE IN INTERMEDIATE PRODUCTS

We suggest that it may be ‘too easy’ to attribute real exchange rate movements to deviations from the law of one price. We show that it is immaterial whether one uses seemingly traded goods, nontraded goods, or even a single, unimportant consumer good, say beer. The ease of attributing the variation to any such deviations is explained using a model with intermediate goods trade. In the model, the stage of production determines the traded/nontraded distinction. We find empirical substantiation for the model: law of one price deviations lose explanatory power and, defined appropriately in terms of intermediate goods, relative prices matter.     

On the Terms of Trade and Sectoral Reallocations

A commonly held view is that a small open economy adjusts to a negative external shock by switching both expenditure and resources toward the domestic traded goods sector. We show that, when both labor and imported inputs are used as factors of production, the average labor intensity in the nontraded sector may increase substantially with a decline in the terms of trade. This can lead to an internal transfer of labor into the nontraded sector, and an improvement in the trade balance even with a decline in traded sector output. This result depends on a combination of a high elasticity of substitution across nontraded varieties and large differences in labor intensities in the production of nontraded varieties. Our analysis suggests that intersectoral labor flows are not necessarily a good measure of an economy's flexibility, and that intersectoral resource reallocation and expenditure‐switching can move in opposite directions.