Intersectoral adjustment and unemployment in a two-country Ricardian model
AbstractIn 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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Bibliographic InfoPaper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2004023.
Date of creation: 01 Jun 2004
Date of revision:
Comparative advantage; Adjustment process; Interdependent countries;
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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