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On the Distributive Effects of Terms of Trade Shocks; The Role of Non-tradable Goods


  • International Monetary Fund


We introduce non-tradable goods to the Heckscher-Ohlin-Samuelson (HOS) model to study the distributive effects of terms of trade shocks. We show that the employment of resources in activities producing exclusively for the local market induces a crucial association between domestic spending and factor demand and prices, which is absent in the usual HOS framework. Specifically, in a two-sector economy (producing only exportable and non-tradable goods) there are no redistributive effects of external terms of trade shifts-i.e. no Stolper-Samuelson-type of effect. By extending the model to the domestic production of a third, importable good, we show that distributional tensions arise. Distributional conflicts occur within urban labor groups (skilled vs. unskilled) and not only between the "traditional" rural vs. urban factors. Finally, export taxes are imposed to re-distribute the effects of external shocks. We show that the ability of the government to cushion the impact of the terms of trade shift on the economy’s income distribution depends crucially on the use of the tax revenues.

Suggested Citation

  • International Monetary Fund, 2010. "On the Distributive Effects of Terms of Trade Shocks; The Role of Non-tradable Goods," IMF Working Papers 10/241, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:10/241

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    References listed on IDEAS

    1. Galiani, Sebastian & Heymann, Daniel & Dabús, Carlos & Tohmé, Fernando, 2008. "On the emergence of public education in land-rich economies," Journal of Development Economics, Elsevier, vol. 86(2), pages 434-446, June.
    2. Kevin H. O'Rourke & Alan M. Taylor, 2006. "Democracy and Protectionism," NBER Working Papers 12250, National Bureau of Economic Research, Inc.
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    Cited by:

    1. repec:spr:cliomt:v:11:y:2017:i:3:d:10.1007_s11698-016-0150-9 is not listed on IDEAS
    2. Gerchunoff, Pablo & Rapetti, Martín, 2016. "La economía argentina y su conflicto distributivo estructural (1930-2015)," El Trimestre Económico, Fondo de Cultura Económica, vol. 0(330), pages .225-272, abril-jun.
    3. repec:spr:laecrv:v:27:y:2018:i:1:d:10.1007_s40503-017-0047-4 is not listed on IDEAS
    4. Juan Guerra-Salas, 2016. "Fiscal Policy, Sectoral Allocation, and the Skill Premium: Explaining the Decline in Latin America’s Income Inequality," Working Papers Central Bank of Chile 779, Central Bank of Chile.

    More about this item


    Economic development; Non-tradable goods; terms of trade shocks; distributive conflict and export taxes; export taxes; terms of trade; export tax; skilled labor; tradable goods; Neoclassical Models of Trade; Nonrenewable Resources and Conservation: General;

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