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Terms of Trade Shocks and Endogenous Search Unemployment: A Two-sector Model with Non-Traded goods

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  • Yu Sheng
  • Xingpeng Xu
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Abstract

We develop a simple and tractable two-sector search model featuring a non-traded sector and endogenous search unemployment to examine the impact of terms of trade shocks on unemployment. We show that changes in terms of trade will not only lead to employment reallocation across sectors, as in the traditional trade models, but more importantly, impact upon search unemployment within each sector. Specifically, we show that an improvement (deterioration) of terms of trade reduces (increases) unemployment rates in both traded and non-traded sectors.

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Bibliographic Info

Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c012_025.

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Length: 25 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:deg:conpap:c012_025

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Keywords: two-sector search model; trade and unemployment; non-traded good;

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References

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  1. Brecher, Richard A, 1974. "Minimum Wage Rates and the Pure Theory of International Trade," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 88(1), pages 98-116, February.
  2. Klaus Wälde & Pia Weiss, 2006. "Relative Price Changes, Wages and Unemployment in a Specific Factors Model with Search Frictions," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 10(3), pages 400-410, 08.
  3. Mendoza, Enrique G., 1997. "Terms-of-trade uncertainty and economic growth," Journal of Development Economics, Elsevier, Elsevier, vol. 54(2), pages 323-356, December.
  4. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  5. Zanias, George P., 2005. "Testing for trends in the terms of trade between primary commodities and manufactured goods," Journal of Development Economics, Elsevier, Elsevier, vol. 78(1), pages 49-59, October.
  6. Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, American Economic Association, vol. 75(4), pages 676-90, September.
  7. Fernandez, Raquel, 1992. "Terms-of-Trade Uncertainty, Incomplete Markets and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(4), pages 881-94, November.
  8. Davidson, Carl & Martin, Lawrence & Matusz, Steven, 1999. "Trade and search generated unemployment," Journal of International Economics, Elsevier, Elsevier, vol. 48(2), pages 271-299, August.
  9. Brecher, Richard A., 1992. "An efficiency-wage model with explicit monitoring : Unemployment and welfare in an open economy," Journal of International Economics, Elsevier, Elsevier, vol. 32(1-2), pages 179-191, February.
  10. Hosios, Arthur J, 1990. "Factor Market Search and the Structure of Simple General Equilibrium Models," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(2), pages 325-55, April.
  11. McCall, John J, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(1), pages 113-26, February.
  12. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 433-44, June.
  13. Davidson, Carl & Martin, Lawrence & Matusz, Steven, 1988. "The Structure of Simple General Equilibrium Models with Frictional Unemployment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(6), pages 1267-93, December.
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Cited by:
  1. Chaudhuri, Sarbajit & Bandopadhyay, Titas Kumar, 2013. "Job-search and foreign capital inflow — A three-sector general equilibrium analysis," Economic Modelling, Elsevier, Elsevier, vol. 35(C), pages 159-169.
  2. 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.
  3. Juan Pablo Medina & Alberto Naudon, 2012. "Labor Market Dynamic in Chile:The Role of the Terms of Trade," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 15(1), pages 32-75, April.

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