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Production and the Trade Balance in a Small Open Economy

Author

Listed:
  • Thompson, Henry

    (Auburn University)

Abstract

The trade balance is built directly into a factor proportions model of produc - tion. A wealth stockpile of the exported good is maintained, growing when the small open economy has a surplus and shrinking with a deficit. Income and prices determine consumption of exports and imports, while production adjusts to maintain full employment and competitive pricing. The trade balance effects of an import tariff and an export subsidy (equivalently, a devaluation) depend on factor intensity, factor substitution, demand, and factor endowments. Chang - ing factor endowments have no net effect on the trade balance, a reflection of factor price equalization.

Suggested Citation

  • Thompson, Henry, 1999. "Production and the Trade Balance in a Small Open Economy," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 14, pages 432-441.
    • Handle: RePEc:ris:integr:0112
    as

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    Citations

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    Cited by:

    1. Jong Eun Lee, 2004. "The sequential issue in free trade areas: Policy implication for Korea," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(2), pages 165-174.
    2. Ahmad, Syafiq & Masih, Mansur, 2018. "The lead-lag relationship between industrial production and international trade: Malaysian evidence," MPRA Paper 114290, University Library of Munich, Germany.

    More about this item

    Keywords

    trade balance; small open economy; tariff; subsidy; factor endowments;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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