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Intersectoral adjustment and unemployment in a two-country Ricardian model
Published online by Cambridge University Press: 17 August 2016
Summary
In a two-country Ricardian model, we study the dynamics of intersectoral reallocation of labour following upon a once and for all move to free trade. The job creation/destruction process in both sectors is slow and this results in unemployment during the transition toward the long run free trade equilibrium. We identify different free trade regimes depending on whether or not the world relative price is between the two autarkic prices. In some regimes, one of the two countries overshoots its autarkic equilibrium i.e. temporarily specializes according to its comparative disadvantage. In that case, welfare increases in both countries. In other regimes, the adjustment process is monotonic in both countries but welfare increases in only one country. When the two countries have “very” different rates of job creation/ destruction, the world price adjusts in such a way that the difference in adjustment speed between the two countries decreases.
Résumé
Dans un modèle Ricardien à deux pays, nous analysons la dynamique de la réallocation intersectorielle de la main d'oeuvre consécutive à un passage au libre-échange. Le processus de création/destruction de postes de travail dans les deux secteurs est lent, générant ainsi du chômage pendant la transition vers l'équilibre mondial de long terme. Nous identifions différents régimes de libre-échange selon le niveau du prix relatif mondial par rapport aux niveaux des prix d'autarcie. Pour certains régimes, l'un des deux pays effectue un sur-ajustement en se spécialisant temporairement dans le bien pour lequel il détient un désavantage comparatif. On montre que dans ces situations, le bien-être augmente dans les deux pays. Pour d'autres régimes de libre-échange, le processus d'ajustement suit une trajectoire monotone dans les deux pays mais le bien-être n'augmente que dans un des deux pays. Lorsque les deux pays ont des taux de création/destruction de postes de travail très différents, le prix mondial s'ajuste de telle manière que la différence dans les vitesses d'ajustement des deux économies diminue.
Keywords
- Type
- Research Article
- Information
- Recherches Économiques de Louvain/ Louvain Economic Review , Volume 70 , Issue 2 , 2004 , pp. 169 - 192
- Copyright
- Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2004
Footnotes
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We would like to thank two anonymous referees for their detailed and helpful comments. The paper also benefited from discussions with Pierre Granier.
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