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Favorable External Shocks, Sectoral Adjustment and De-industrialization in Non-Oil Producing Economies

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  • Baek, Seung-Gwan
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    Abstract

    This paper examines the extent to which a favorable external shock such as the lower price of an intermediate input affects sectoral output and employment, the real exchange rate the wage in an economy where the input has no domestic production at all. The analytical framework is a real, short-run model based on a three-sector, three-factor small open economy. The effect of the shock on the variables concerned depends on the structural characteristics of production and consumption in the economy. In the normal case, the traded sectors initially favored by the shock expand the most among sectors while the other tradables suffer. The real exchange rate may appreciate along with the upsurge of wages. The shock can produce many other possible cases, however: The nontraded sector may grow at the expense of the traded sectors including the favored sector, thus leading to de-industrialization. An extreme case is that the positive effect on output and employment may occur only at the traded sectors that are initially unfavored by the shock. The shock may bring about real depreciation, or a decline in nominal wages, too.

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    Bibliographic Info

    Paper provided by Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley in its series Center for International and Development Economics Research, Working Paper Series with number qt9hg553xj.

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    Date of creation: 10 Jun 1996
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    Handle: RePEc:cdl:ciders:qt9hg553xj

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    Keywords: imported intermediate inputs; gross complements and substitutes; sectoral output and employment;

    References

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    1. Burgess, David F., 1974. "Production theory and the derived demand for imports," Journal of International Economics, Elsevier, vol. 4(2), pages 103-117, May.
    2. Jorge E. Roldos, 1992. "A Dynamic Specific-Factors Model with Money," Canadian Journal of Economics, Canadian Economics Association, vol. 25(3), pages 729-42, August.
    3. Buffie, Edward F., 1989. "Imported inputs, real wage rigidity and devaluation in the small open economy," European Economic Review, Elsevier, vol. 33(7), pages 1345-1361, September.
    4. van Wijnbergen, Sweder J G, 1984. "The 'Dutch Disease': A Disease after All?," Economic Journal, Royal Economic Society, vol. 94(373), pages 41-55, March.
    5. Bruno, Michael, 1982. " Adjustment and Structural Change under Supply Shocks," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 199-221.
    6. Bruno, Michael & Sachs, Jeffrey, 1982. "Energy and Resource Allocation: A Dynamic Model of the "Dutch Disease"," Review of Economic Studies, Wiley Blackwell, vol. 49(5), pages 845-59, Special I.
    7. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
    8. Corden, W M, 1984. "Booming Sector and Dutch Disease Economics: Survey and Consolidation," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 359-80, November.
    9. Buffie, Edward F., 1984. "The macroeconomics of trade liberalization," Journal of International Economics, Elsevier, vol. 17(1-2), pages 121-137, August.
    10. Jonathan Eaton, 1987. "A Dynamic Specific-Factors Model of International Trade," NBER Working Papers 1479, National Bureau of Economic Research, Inc.
    11. Kamas, Linda, 1986. "Dutch disease economics and the Colombian export boom," World Development, Elsevier, vol. 14(9), pages 1177-1198, September.
    12. Eastwood, R K & Venables, A J, 1982. "The Macroeconomic Implications of a Resource Discovery in an Open Economy," Economic Journal, Royal Economic Society, vol. 92(366), pages 285-99, June.
    13. Michael Bruno & Jeffrey Sachs, 1982. "Energy and Resource Allocation: A Dynamic Model of the "Dutch Disease"," NBER Working Papers 0852, National Bureau of Economic Research, Inc.
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