Didier LAUSSEL (GREQAM / IDEP et UniversitŽ de la MŽditerranŽe) Philippe MICHEL (Institut Universitaire de France, GREQAM et UniversitŽ de la MŽditerranŽe) Thierry Paul (GREQAM / IDEP et UniversitŽ de la MŽditerranŽe)
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In a two-country Ricardian model, we study the dynamics of intersectoral reallocation of labour following upon a once and for ail move to free trade. The job creation/destruction process in both sectors is slow and this results in unemployment during the transition toward the long run free trade equilibrium. We identify different free trade regimes depending on whether or not the world relative price is between the two autarkic prices. In some regimes, one of the two countries overshoots its autarkic equilibrium i.e. temporarily specializes according to its comparative disadvantage. In that case, welfare increases in both countries. In other regimes, the adjustment process is monotonie in both countries but welfare increases in only one country. When the two countries have "very" different rates of job creation/destruction, the world price adjusts in such a way that the difference in adjustment speed between the two countries decreases.
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Find related papers by JEL classification: F11 - International Economics - - Trade - - - Neoclassical Models of Trade F16 - International Economics - - Trade - - - Trade and Labor Market Interactions O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
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