Devaluation, Export Quality and Employment in A Small Dependent Economy

This paper investigates how currency devaluation by a small open economy affects its export quality when higher qualities are intensive in domestic factors like skilled labour and capital, rather than on imported input; and the ramifications of such quality changes on employment of unskilled labour and real income or welfare of the economy. In a competitive general equilibrium structure with cost of export quality determined endogenously, changes in export quality is shown to be contingent upon whether higher quality is more skill intensive or more capital intensive. Thus, across-the-board devaluation will have asymmetric impact on the quality choice of export goods that differ in relative skill or capital requirement for quality improvement. However, aggregate employment of unskilled labour rises unambiguously under homothetic taste, and under reasonable conditions under non-homothetic tastes. These results qualify several robustness checks.