Consumption efficiency hypothesis and the optimality of free trade policy in a small open economy

Chaudhuri, Sarbajit and Banerjee, Dibyendu (2007): Consumption efficiency hypothesis and the optimality of free trade policy in a small open economy. Unpublished.

Abstract

The paper is designed to examine the optimality of the free trade policy in a small poor economy incorporating the consumption efficiency hypothesis in the simple two-by-two Heckscher-Ohlin-Samuelson (HOS) framework. It finds that the protectionist policy in the form of a tariff on the capital-intensive import-competing sector may improve social welfare and unambiguously raise the economy-wide effective employment.

• Item Type: MPRA Paper
• Institution: University of Calcutta
• Language: English
• Keywords: Consumption efficiency hypothesis; Optimality of free trade; Protectionist policy; Heckscher-Ohlin-Samuelson model; Effective employment
• Subjects: J - Labor and Demographic Economics > J4 - Particular Labor Markets > J41 - Contracts: Specific Human Capital, Matching Models, Efficiency Wage Models, and Internal Labor Markets; O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O15 - Human Resources; Human Development; Income Distribution; Migration

References

Bliss, C.J. and Stern, N,H. (1978): ‘Productivity, wages, and nutrition, Parts I and II’, Journal of Development Economics 5. Bose, G. (1996): ‘Agrarian efficiency wages in a dual economy’, Journal of Development Economics 49, 371-386. Corden, W.M. and R. Findlay (1975): Urban unemployment, intersectoral capital mobility, and development policy in a dual economy. Economica 42, 59–78. Dasgupta, P. and Ray, D. (1986): ‘Inequality as a determinant of malnutrition and unemployment’ Economic Journal 96, 1011-1034. ILO (2007): Global employment trends, January 2007, International Labour Office, Geneva. Jones, R.W. (1965): ‘The structure of simple general equilibrium models’, Journal of Political Economy 73, 557-572. Leibenstein, H. (1957): Economic Backwardness and Economic Growth, Wiley, New York. Leibenstein, H. (1958): ‘Underemployment in backward economies: Some additional notes’, Journal of Political Economy 66, 256-258. Mazumdar, D. (1959): ‘The marginal productivity theory of wages and disguised unemployment’, Review of Economic Studies. Mirrlees, J.A. (1976): ‘A pure theory of underdeveloped economies, In: L. Reynolds (ed.), Agriculture in Development Theory (Yale University Press, New Haven, CT). Ray, D. (1993): ‘Labour markets, adaptive mechanisms, and nutritional status’, In P.K. Bardhan, et al. (eds.), Development and Change: Essays in Honour of K.N. Raj, Oxford University Press, Oxford. Stiglitz, J.E. (1976): ‘The efficiency wage hypothesis, surplus labour and the distribution of labour in LDCs’, Oxford Economic Papers 28, 185-207. World Development Report (2006): Equity and Development, The World Bank and Oxford University Press, New York. World Development Report (2000/2001): Attacking Poverty, The World Bank, Oxford University Press, New York