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Does it Matter Whether Market Distortions are Evaluated Using Comparative-statics or Dynamics?

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  • Peter G. Mavromatis
  • George Verikios

Abstract

We analyse the welfare outcomes of market distortions using a general-equilibrium model of a small, open economy that captures the trade-theoretic continuum from specific factors to Heckscher-Ohlin. We show the importance of two intrinsically dynamic phenomena on evaluating market distortions: structural change and imperfect factor mobility. We find that when these phenomena are captured in a dynamic framework, market distortions can generate welfare effects that contradict those generated by a comparative-static framework. We also find that the degree of factor mobility is important for accurately estimating the size of welfare effects. Our results suggest that market distortions should be evaluated in a dynamic framework that represents structural change and imperfect factor mobility, and that the degree of factor mobility should be treated as a parameter whose value is uncertain and subjected to sensitivity analysis.

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Bibliographic Info

Paper provided by Victoria University, Centre of Policy Studies/IMPACT Centre in its series Centre of Policy Studies/IMPACT Centre Working Papers with number g-178.

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Date of creation: Nov 2008
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Handle: RePEc:cop:wpaper:g-178

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Keywords: market distortions; welfare; comparative-statics versus dynamics; general equilibrium;

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References

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  1. DeVuyst, Eric A. & Preckel, Paul V., 1997. "Sensitivity analysis revisited: A quadrature-based approach," Journal of Policy Modeling, Elsevier, vol. 19(2), pages 175-185, April.
  2. Hiscox, Michael J., 2001. "Class Versus Industry Cleavages: Inter-Industry Factor Mobility and the Politics of Trade," International Organization, Cambridge University Press, vol. 55(01), pages 1-46, December.
  3. Harrison, W Jill & Pearson, K R, 1996. "Computing Solutions for Large General Equilibrium Models Using GEMPACK," Computational Economics, Society for Computational Economics, vol. 9(2), pages 83-127, May.
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  5. Jonathan Eaton, 1987. "A Dynamic Specific-Factors Model of International Trade," NBER Working Papers 1479, National Bureau of Economic Research, Inc.
  6. Ishii, Naoko & McKibbin, Warwick & Sachs, Jeffrey, 1985. "The economic policy mix, policy cooperation, and protectionism: Some aspects of macroeconomic interdependence among the United States, Japan, and other OECD countries," Journal of Policy Modeling, Elsevier, vol. 7(4), pages 533-572.
  7. Terrie L. Walmsley & Thomas W. Hertel & Elena Ianchovichina, 2006. "Assessing The Impact Of China'S Wto Accession On Investment," Pacific Economic Review, Wiley Blackwell, vol. 11(3), pages 315-339, October.
  8. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-38, March.
  9. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215.
  10. Harry G. Johnson, 1960. "The Cost of Protection and the Scientific Tariff," Journal of Political Economy, University of Chicago Press, vol. 68, pages 327.
  11. Ester Gomes da Silva & Aurora A.C. Teixeira, 2006. "Surveying structural change: seminal contributions and a bibliometric account," FEP Working Papers 232, Universidade do Porto, Faculdade de Economia do Porto.
  12. Begg, Iain, 1995. "Factor Mobility and Regional Disparities in the European Union," Oxford Review of Economic Policy, Oxford University Press, vol. 11(2), pages 96-112, Summer.
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Cited by:
  1. Bandopadhyay, Titas Kumar & Chaudhuri, Sarbajit, 2011. "Job-search and FDI in a two-sector general equilibrium model," MPRA Paper 35564, University Library of Munich, Germany.

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