International Trade and Domestic Distortions: Modelling the Transition Process
AbstractAccording to the standard view, when full competition prevails in product, labour, and capital markets, positive or negative external trade shocks may be accommodated by the migration of jobs between sectors; the negative impact on some households' income of lower nominal wages will be more than offset by lower prices of imported final goods. Unemployment, if any, will be temporary, unless labour market rigidities prevent the necessary adjustment. We argue that trade shocks trigger a process of creative destruction that necessarily causes distortions in the structure of productive capacity and hence market disequilibria. Therefore, the structural change that follows trade shocks can no longer be analysed within an equilibrium framework. The transition following a shock may be characterized by increasing imbalances, and create scope for policy intervention. The model presented in this paper, which focuses on the time dimension of production and market imbalances, allows clarifying the debate.
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Bibliographic InfoPaper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2007-18.
Date of creation: 2007
Date of revision:
globalization; trade; financial constraints; creative destruction; wage flexibility; time to build; Firm migration;
Other versions of this item:
- Jean-Luc Gaffard & Francesco Saraceno, 2007. "International Trade and Domestic Distortions: Modelling the Transition Process," Sciences Po publications nÂ°2007-18, Sciences Po.
- F11 - International Economics - - Trade - - - Neoclassical Models of Trade
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
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- Francesco Saraceno, 2003.
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- Mario Amendola & Jean-Luc Gaffard & Francesco Saraceno, 2001.
"Wage Flexibility and Unemployment : the Keynesian Perspective Revisited,"
Sciences Po publications
2001-02, Sciences Po.
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- Mario Amendola & Jean-Luc Gaffard & Francesco Saraceno, 2001. "Wage Flexibility and Unemployment: The Keynesian Perspective Revisited," Documents de Travail de l'OFCE 2001-02, Observatoire Francais des Conjonctures Economiques (OFCE).
- Paul A. Samuelson, 2004. "Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 135-146, Summer.
- Paul Krugman, 1996. "Domestic Distortions and the Deindustrialization Hypothesis," NBER Working Papers 5473, National Bureau of Economic Research, Inc.
- Jean-Luc Gaffard & Francesco Saraceno, 2008. "Tariffs, trade and unemployment in a disequilibrium model: issues and policies," Journal of Evolutionary Economics, Springer, vol. 18(2), pages 219-232, April.
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