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Production and the Trade Balance in a Small Open Economy


  • Thompson, Henry

    () (Auburn University)


The trade balance is built directly into a factor proportions model of produc - tion. A wealth stockpile of the exported good is maintained, growing when the small open economy has a surplus and shrinking with a deficit. Income and prices determine consumption of exports and imports, while production adjusts to maintain full employment and competitive pricing. The trade balance effects of an import tariff and an export subsidy (equivalently, a devaluation) depend on factor intensity, factor substitution, demand, and factor endowments. Chang - ing factor endowments have no net effect on the trade balance, a reflection of factor price equalization.

Suggested Citation

  • Thompson, Henry, 1999. "Production and the Trade Balance in a Small Open Economy," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 14, pages 432-441.
  • Handle: RePEc:ris:integr:0112

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    Cited by:

    1. Jong Eun Lee, 2004. "The sequential issue in free trade areas: Policy implication for Korea," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(2), pages 165-174.

    More about this item


    trade balance; small open economy; tariff; subsidy; factor endowments;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics


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