Monopoly,intermediate goods and the pure theory of international trade

Conclusion In a model with two traded good sectors between which intersectoral flows of intermediate goods are allowed and with a monopolized non-traded good sector, the wage rate in terms of two traded goods increases and the rental of capital in terms of two traded goods decreases when the price of relatively more labor intensive traded good sector increases, though nothing definite can be said about the direction of change in the wage rate and rental in terms of the non-traded good. When prices of traded goods are kept constant and labor and/or capital increase(s), output of the non-traded good sector increases provided that the non-traded good is not inferior, having income elasticity of demand less than unity. The factor intensity condition for the traded goods is in general not sufficient for the validity of the Rybczynski theorem to hold with respect to net outputs of the traded goods. We have derived sufficient conditions for the magnification effect to be observed with respect to net outputs of the traded good sectors. Specifically, we have shown that the factor intensity condition (23) is sufficient for the magnification effect to prevail when only labor increases.     

International migration,non-traded goods and economic welfare in a two-class economy: A reply

This paper sketches a formal model of an economy producing traded and non-traded goods in which two classes of individuals are differentiated, each owning different endowments of capital and labor and allocating different proportions of their income to the consumption of each commudity. The effects of emigration on prices, income distribution and the real income of each class is then examined.     

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.     

Skilled-unskilled wage inequality and unemployment: A general equilibrium analysis

The paper develops a static three sector competitive general equilibrium model of a small open economy in which skilled labor is mobile between a traded good sector and the non-traded good sector and unskilled labor is specific to another traded good sector. Capital is perfectly mobile among all these three sectors. We introduce involuntary unemployment equilibrium in both the labor markets and explain unemployment using efficiency wage hypothesis. We examine the effects of change in different factor endowments and prices of traded goods on the unemployment rates and on the skilled-unskilled relative wage. Also, we introduce Gini-Coefficient of wage income distribution as a measure of wage income inequality; and show that a comparative static effect may force the skilled-unskilled relative wage and the Gini-Coefficient of wage income distribution to move in opposite directions in the presence of unemployment.     

Short-term policy in open semi-industrialized economies: The narrow limits of the possible

This paper develops a model to analyze short-term policy alternatives in semi-industrialized countries. The major points raised are the following: (i) There are two sectors, producing traded and non-traded goods. The latter is characterized by a fairly low elasticity of substitution and a high relative labor share. If the elasticity of substitution in the traded goods sector has an econometrically reasonable value, then short-run improvements in both the labor share and real income may well call for revaluation of the exchange rate and an increase in home good's price (prices of both goods being measured in wage units). (ii) If excess supply functions have Walrasian stability, such price changes will lead to deterioration in the balance of payments: On the other hand, devaluation-induced improvement in the balance of payments (with constant government expenditure) can lead to an improvement in real income, but reduces the labor share. (iii) If the economy is formally unstable, due to capitalists and laborers concentrating their expenditure demands respectively on the goods intensive in factor payments to themselves, then balance of payments improvement in a comparative static analysis may entail reductions in both real income and the labor share. (iv) If the additional realistic assumption is made that elasticities of excess supply functions for the two goods with respect to the interest rate are quite low, then in general improvement of all three targets (real income, balance of payments, and income distribution) will be unattainable. If in addition the government cannot finance expenditure changes by anything but money supply changes, then in general only one target variable can be attained. (v) Numerical sensitivity analysis based on Chilean data indicates that these (and other) rather pessimistic results hold for fairly wide ranges of ‘plausible’ parameter values, as long as the model's short-run Keynesian assumptions are maintained.     

Federal fiscal transfer rules in monetary unions

This paper considers simple rules for federal fiscal transfers that automatically redistribute funds among member states of a monetary union to counteract adverse idiosyncratic shocks. The transfer rules target regional differences in nominal GDP, consumption spending, labor income, and fiscal deficits. Targeting regional fiscal deficits is the only rule that reduces consumption fluctuations and that promotes interregional consumption risk sharing, but the overall welfare effect is negative. In contrast, targeting regional differences in labor income yields the largest welfare gains, but it also yields the largest fluctuations in consumption and real GDP. It is demonstrated that the welfare gains primarily stem from reducing the allocative inefficiency of input factors caused by nominal rigidities. The optimal transfer rule essentially implies a combination of consumption spending and labor income targeting, and it primarily targets the allocative inefficiency of factor inputs at the cost of lower interregional consumption risk sharing.     

Environmental control,wage inequality and national welfare in a tourism economy

This paper examines the effects of stricter environmental regulation on income distribution and welfare for an open economy with inbound tourism. The pollution input is considered as a mobile factor between sectors, and a decrease in it lowers wages of skilled labor in the traded sector but can increase the wages of unskilled labor in the non-traded sector. A stricter policy on environmental controls can narrow wage inequality and increase welfare if the tourism terms-of-trade effect dominates. These results are confirmed by simulations.     

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.     

TOURISM AND REGIONAL IMMISERIZATION

Abstract.  This paper analyzes the consequences of tourism in rural and urban areas on regional incomes, welfare and urban unemployment using a generalized Harris Todaro model. In this model two urban and two rural goods are produced. A distinguishing characteristic of this model is that the urban non-traded good is not consumed in the rural region and, similarly, the rural non-traded good is not consumed in the urban region. The most important result we obtain is that a tourist boom in the urban region may immiserize the rural area. Hence the welfare interests of rural and urban consumers may be in conflict as a result of tourist expansion in the urban region.     

Local Import Competition in a Lumpy Country

This paper examines the effects of a fall in the price of an imported good in a region of a country that is specialized in producing that good. The context is a “lumpy country” model in which factors are unable to move between locations, although in this case I assume that only labor is immobile, and that the other factor, capital, is perfectly mobile between regions. With mobile capital, the lumpy-country equilibrium can be anywhere in the factor-price equalization set, but my focus is on a region that initially produces only one good, on the border of that set. When the price of that good falls due to import competition, it would be possible for both factors to reallocate partially into production of the other good, but I assume instead that some capital simply leaves the region, so that it continues to produce only the same good that it did before. The result of this is a fall in the real wage of labor, just as under Stolper-Samuelson assumptions. I then look at production also of a non-traded good, and find that the same import competition that cheapened the traded good also cheapens the nontraded good. The result is that the region shrinks, losing capital and producing less of both goods unless the substitution in favor of the nontraded good expands its consumption out of a smaller income.     

Foreign ownership, non-traded goods and the effects of terms of trade changes on national welfare

This paper extends the theory of international trade in the presence of foreign ownership to incorporate non-traded goods. It is shown that, with non-traded goods, national and aggregate welfare might move in opposite directions in response to a terms of trade deterioration even when national and aggregate trade specialization patterns coincide.     

The Optimal Tariff Formula in a Two-Period Economy

The optimal tariff formula is derived for a large country trading both consumption goods and an investment good in a two-period economy. The formula greatly simplifies the results of the standard one-period economy where both consumption goods and real capital are traded with or without a non-traded good; in particular, the results do not depend on the relative intensities of the two goods.
JEL Classification Numbers: D11, F11, F34.     

Real Interest Rates and Home Goods: A Two-Period Model*

Using a simple model of a small open economy which includes traded and non-traded goods and output in two periods, we demonstrate that changes in real interest rates will be associated with changes in real exchange rates. A high real interest rate will encourage consumers to substitute away from present and toward future consumption. To transfer consumption of non-traded goods intertemporally, intersectoral resource flows are required In the simplest model, this in turn requires opposite movements in the real exchange rate over two periods.     

Income Distribution,Econophysics and Piketty

Piketty, Atkinson and Saez have put the analysis of income distribution back on center stage. The distinction between property income and labor income plays a central role in this framework. Property income derives from the rate of return on stocks of income-earning wealth and is more unequally distributed than labor income. Piketty argues that, because the rate of return (r) is generally greater than the rate of growth of the economy (g), property income tends to grow more rapidly than labor income, so that rising income inequality is an intrinsic tendency of capitalism despite interruptions due to world wars and great depressions. This article argues the exact opposite. The rise of unions and the welfare state were the fruits of long-term historical gains made by labor, and the postwar constraints on real and financial capital arose in sensible reaction to the Great Depression. The ‘neoliberal’ era beginning in the 1980s significantly rolled back all of these. The article uses the econophysics two-class argument of Yakovenko to show that we can explain the empirical degree of inequality using two factors alone: the profit share and the degree of financialization of income. The rise of inequality in the neoliberal era then derives from a reduction in the wage share (rise in the profit share) in the face of assaults on labor and the welfare state, and a sharp increase in the financialization of incomes as financial controls are weakened. These are inherently socio-political outcomes, and what was lost can be regained. Hence, there is no inevitable return to Piketty’s ‘patrimonial capitalism’.     

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.     

Non-Traded Goods and Real Exchange Rate Fluctuations: A Structural VAR Analysis

Real exchange rate variance decompositions indicate that only a small fraction of real exchange rate movements can be attributed to changes in the relative price between traded and non-traded goods. This paper argues that those exercises, by ignoring the nature of the shocks behind real exchange rate changes, may be inadequate to measure the relative importance of non-traded goods prices. Instead, it proposes using a structural vector autoregression (SVAR) model to study the effects of shocks to the relative supply and relative demand for non-traded goods on the real exchange rate. The SVAR model is identified via long-run restrictions and is estimated for a group of advanced economies. The results indicate that for some countries, relative supply shocks can be a significant source of real exchange rate fluctuations.     

Economic recession, skilled unemployment and welfare

The paper develops a three-sector, specific factor, general equilibrium model with two high-skill sectors and unemployment of skilled labor. One of the two high-skill sectors produces a non-traded commodity whose aggregate demand consists of both domestic demand and an exogenously given foreign demand. The consequences of a decline in the foreign demand for the non-traded good resulting from worldwide economic recession on the skilled and unskilled labor markets in a developing economy have been examined. The analysis finds that the effects on the labor markets crucially hinge on the relative factor intensities of the two high-skill sectors and that through the adoption of appropriate fiscal measures; the country can shield its workforce from the rage of global economic downturn.     

Changes in income distribution and welfare from greater immigration of unskilled workers

This paper considers the consequences of greater immigration of unskilled labor on income distribution and welfare in the receiving country. To address these issues, both the sending and receiving countries are represented in a static general equilibrium model which distinguishes between skilled and unskilled labor and which allows prices to be determined endogenously. In this framework an inflow of unskilled labor is likely to reduce wages of unskilled labor, but whether capital or skilled labor benefits depends upon demand elasticities, elasticities of substitution in production, and differences across countries in the productivity of unskilled labor. National welfare in the receiving country is likely to rise, to the extent that the relative price of importable goods falls, non-residents already in the country receive lower wages, immigrants receive lower wages than those paid to domestic workers, and immigrants cause little increased demand for public services and transfer programs.     

The demand for traded and non-traded goods in the U.S.

Annual postwar U.S. data are used to estimate the Rotterdam demand model for traded and non-traded goods. The estimated income elasticity is 1.51 for traded and 0.64 for non-traded goods, while the own-price elasticities are both between −0.3 and −0.2.     

Real exchange rate dynamics in the presence of non-traded goods and transaction costs

This paper studies the role of non-traded goods and transaction costs in accounting for the puzzling behavior of real exchange rates. We show that introducing the transaction costs and non-traded goods in an otherwise standard competitive model dramatically improves its ability to rationalize observed real exchange rate dynamics.