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International Trade and Domestic Distortions: Modelling the Transition Process

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Abstract

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.

Suggested Citation

  • Jean-Luc Gaffard & Francesco Saraceno, 2007. "International Trade and Domestic Distortions: Modelling the Transition Process," Documents de Travail de l'OFCE 2007-18, Observatoire Francais des Conjonctures Economiques (OFCE).
  • Handle: RePEc:fce:doctra:0718
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    References listed on IDEAS

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    1. Paul Krugman, 1996. "Domestic Distortions and the Deindustrialization Hypothesis," NBER Working Papers 5473, National Bureau of Economic Research, Inc.
    2. Francesco Saraceno, 2003. "Wage Regimes, Accumulation and Finance Constraints: Keynesian Unemployment Revisited," Macroeconomics 0311007, EconWPA.
    3. 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.
    4. Mario Amendola & Jean-Luc Gaffard & Francesco Saraceno, 2004. "Wage Flexibility and Unemployment: The Keynesian Perspective Revisited," Scottish Journal of Political Economy, Scottish Economic Society, vol. 51(5), pages 654-674, November.
    5. Amendola, Mario & Gaffard, Jean-Luc, 1998. "Out of Equilibrium," OUP Catalogue, Oxford University Press, number 9780198293804.
    6. Richard A. Brecher, 1974. "Minimum Wage Rates and the Pure Theory of International Trade," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 98-116.
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    Cited by:

    1. Jean-Luc Gaffard, 2008. "Localisation, globalisation, et action publique," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(1), pages 271-290.
    2. Jean-Luc Gaffard & Francesco Saraceno, 2007. "Échange international et distorsions internes. Comment gouverner la globalisation ?," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(3), pages 205-221.
    3. 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.

    More about this item

    Keywords

    globalization; trade; financial constraints; creative destruction; wage flexibility; time to build; Firm migration;

    JEL classification:

    • 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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