According 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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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number
2007-18.
Find related papers by JEL classification: F11 - International Economics - - Trade - - - Neoclassical Models of Trade F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies 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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