A Simple Theory of Trade and Unemployment in General Equilibrium
We develop an open economy general equilibrium model, with auction-based directed search unemployment, to study the interactions of trade and unemployment. The theory ascribes all outcomes purely to the fundamentals of technology and endowment. If countries differ by endowment, trade makes both the unemployment rate and the rental in the capital-(labor-) abundant country rise (decline), but does not lead to equalization. Furthermore, the expected wage is higher in the capital-abundant country. If countries differ by technology, trade increases (decreases) the unemployment rate in the country whose technology is relatively superior (inferior) for producing the capital-intensive good.
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