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Customs Union and the Harris-Todaro Model with International Capital Mobility

  • Michael Michael
  • Stephen Miller

Traditional customs union theory concludes that trade creation enhances welfare. Thus, Yu's (1982) conclusion that trade creation may decrease welfare in the presence of general unemployment is an important observation. Parai and Batra (1987) reestablish the traditional results in the Harris-Todaro model, where unemployment is sector-specific. We conclude that trade creation may decrease welfare in the Harris-Todaro model with international capital mobility when labor subsidies or capital taxes (subsidies) exist. Moreover, second-best labor subsidies or capital subsidies (taxes) recommended by some authors increase the chances of welfare decreasing trade creation. Copyright Kluwer Academic Publishers 1992

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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 3 (1992)
Issue (Month): 1 (February)
Pages: 37-49

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Handle: RePEc:kap:openec:v:3:y:1992:i:1:p:37-49
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  1. Parai, Amar K. & Batra, Raveendra N., 1987. "Customs union and unemployment in LDCs," Journal of Development Economics, Elsevier, vol. 26(2), pages 311-319, August.
  2. Corden, W M & Findlay, Ronald, 1975. "Urban Unemployment, Intersectoral Capital Mobility and Development Policy," Economica, London School of Economics and Political Science, vol. 42(165), pages 59-78, February.
  3. Miyagiwa, Kaz, 1988. "Corporate income tax incidence in the presence of sector-specific unemployment," Journal of Public Economics, Elsevier, vol. 37(1), pages 103-112, October.
  4. Das, Satya P., 1981. "Effects of foreign investment in the presence of unemployment," Journal of International Economics, Elsevier, vol. 11(2), pages 249-257, May.
  5. J. Bhagwati & T. N. Srinivasan, 1973. "Alternative Policy Rankings in a Large, Open Economy with Sector-Specific, Minimum Wages," Working papers 109, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Yu, Eden S H, 1982. "Unemployment and the Theory of Customs Unions," Economic Journal, Royal Economic Society, vol. 92(366), pages 399-404, June.
  7. Funatsu, Hideki, 1988. "A Note on the Stability of the Harris-Todaro Model with Capital Mobility," Economica, London School of Economics and Political Science, vol. 55(217), pages 119-21, February.
  8. Neary, J Peter, 1981. "On the Harris-Todaro Model with Intersectoral Capital Mobility," Economica, London School of Economics and Political Science, vol. 48(191), pages 219-34, August.
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