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

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Author Info
Peter G. Mavromatis
George Verikios

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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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Paper provided by Monash 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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Related research
Keywords: market distortions; welfare; comparative-statics versus dynamics; general equilibrium;

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Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - 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

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  1. 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, February. [Downloadable!]
  2. 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. [Downloadable!] (restricted)
  3. 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.
  4. Harrison, W Jill & Pearson, K R, 1996. "Computing Solutions for Large General Equilibrium Models Using GEMPACK," Computational Economics, Springer, vol. 9(2), pages 83-127, May.
    Other versions:
  5. 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. [Downloadable!]
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  6. Kouparitsas, Michael A., 2001. "Should trade barriers be phased-out slowly? A case study of North America," Journal of Policy Modeling, Elsevier, vol. 23(8), pages 875-900, November. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  8. Michael J. Hiscox, 2001. "Class Versus Industry Cleavages: Inter-Industry Factor Mobility and the Politics of Trade," International Organization, MIT Press, vol. 55(1), pages 1-46, March. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
  10. Jonathan Eaton, 1987. "A Dynamic Specific-Factors Model of International Trade," NBER Working Papers 1479, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Harry G. Johnson, 1960. "The Cost of Protection and the Scientific Tariff," Journal of Political Economy, University of Chicago Press, vol. 68, pages 327. [Downloadable!] (restricted)
  12. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215. [Downloadable!] (restricted)
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