Foreign capital, Non-Traded Goods and Welfare in a Developing Economy in the presence of Externalities

Chaudhuri, Sarbajit (2013): Foreign capital, Non-Traded Goods and Welfare in a Developing Economy in the presence of Externalities.

Abstract

A three-sector, three-factor general equilibrium model is developed for a small open developing economy where an inflow of foreign capital generates externalities in the presence of a non-traded final commodity. There are two types of capital and the efficiency of labour depends positively on the consumption of the non-traded commodity. Effects of inflows of foreign capital on social welfare and human capital formation are examined. The analysis finds that while capital that is used in all the sectors may improve welfare; capital used specifically in the non-traded sector is likely to affect social welfare adversely. These results can at least question the desirability of allowing entry of foreign capital in the non-traded final good sector that emanates externalities.

• Item Type: MPRA Paper
• Language: English
• Keywords: Foreign capital, externality, non-traded good, social welfare, human capital formation, general equilibrium.
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F6 - Economic Impacts of Globalization; H - Public Economics > H2 - Taxation, Subsidies, and Revenue; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies; H - Public Economics > H5 - National Government Expenditures and Related Policies; H - Public Economics > H5 - National Government Expenditures and Related Policies > H53 - Government Expenditures and Welfare Programs; J - Labor and Demographic Economics > J4 - Particular Labor Markets; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements

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