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Long-run Lunacy, Short-run Sanity: a Simple Model of Trade with Labor Market Turnover

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Author Info
Carl Davidson
Steven J. Matusz

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Abstract

It is often argued that international trade is all about long-run relationships. In this paper, we argue that this view is flawed when factor markets are characterized by turnover. Toward that end, we provide a simple dynamic model of trade with labor market turnover and show that the relationship between the economy's short-run and long-run behavior is more complex than in traditional trade models. For example, in the short run, the economy may produce outside of its long-run frontier. We show that focusing on long-run relationships can lead one to draw faulty policy conclusions, while focusing on its short-run behavior restores sanity. The implication is that in the presence of factor market turnover, international trade issues can only be understood by studying the entire dynamic path of the economy. Long-run relationships should be ignored. Copyright © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd.

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File URL: http://www.blackwell-synergy.com/links/doi/10.1111/j.1467-9396.2006.00574.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Review of International Economics.

Volume (Year): 14 (2006)
Issue (Month): 2 (05)
Pages: 261-276
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Handle: RePEc:bla:reviec:v:14:y:2006:i:2:p:261-276

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  1. Willmann, Gerald & Blanchard, Emily, 2007. "Political Stasis or Protectionist Rut? Policy Mechanisms for Trade Reform in a Democracy," Economics Working Papers 2007,21, Christian-Albrechts-University of Kiel, Department of Economics. [Downloadable!]
    Other versions:
  2. Bruno Decreuse & Paul Maarek, 2008. "FDI and the labor share in developing countries: A theory andsome evidence," Working Papers halshs-00333704_v1, HAL. [Downloadable!]
    Other versions:
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