Does it Matter Whether Market Distortions are Evaluated Using Comparative-statics or Dynamics?
AbstractWe 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 InfoPaper 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.
Date of creation: Nov 2008
Date of revision:
market distortions; welfare; comparative-statics versus dynamics; general equilibrium;
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-14 (All new papers)
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