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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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/241.

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Length: 38
Date of creation: 01 Oct 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/241
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  1. O'Rourke, Kevin Hjortshøj & Taylor, Alan M., 2006. "Democracy and Protectionism," CEPR Discussion Papers 5698, C.E.P.R. Discussion Papers.
  2. 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.
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