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Endogenous labour market imperfection, foreign direct investment and external terms-of-trade shocks in a developing economy

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  • Chaudhuri, Sarbajit
  • Biswas, Anindya

Abstract

This theoretical paper shows that developing countries possess an inherent shock-absorbing mechanism that stems from their peculiar institutional characteristics and can lessen the gravity of detrimental welfare consequence of international terms-of-trade disturbances in terms of a static two-sector, full-employment general equilibrium model with endogenous labour market distortion. The supply of foreign capital in the economy is a positive function of the return to capital. Subsequently, it has been verbally explained why the main result of the full-employment model would remain valid even in a two-sector specific-factor Harris-Todaro type model with urban unemployment. The analysis leads to a couple of important policies that should be adhered to preserve this in-built system. Finally, it offers three important statistically testable hypotheses which would pave the way for future empirical research in this area.

Suggested Citation

  • Chaudhuri, Sarbajit & Biswas, Anindya, 2016. "Endogenous labour market imperfection, foreign direct investment and external terms-of-trade shocks in a developing economy," Economic Modelling, Elsevier, vol. 59(C), pages 416-424.
  • Handle: RePEc:eee:ecmode:v:59:y:2016:i:c:p:416-424
    DOI: 10.1016/j.econmod.2016.08.011
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    References listed on IDEAS

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    More about this item

    Keywords

    Terms-of-trade shock; Labour market imperfection; Supply function of FDI; Urban unemployment; Social welfare; Developing countries; General equilibrium;

    JEL classification:

    • D59 - Microeconomics - - General Equilibrium and Disequilibrium - - - Other
    • D60 - Microeconomics - - Welfare Economics - - - General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation

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