Do Developing Countries Possess any Built-in Mechanism that Copes with External Terms-of-trade Shocks?

Chaudhuri, Sarbajit (2014): Do Developing Countries Possess any Built-in Mechanism that Copes with External Terms-of-trade Shocks?

Abstract

This theoretical note shows that developing countries possess an inherent shock-absorbing mechanism that stems from their peculiar institutional characteristics that can lessen the gravity of detrimental welfare consequence of exogenous terms-of-trade disturbances in terms of a two-sector, full-employment general equilibrium model with endogenous labour market distortion. The analysis leads to a couple of important policies that should be adhered to preserve this in-built system. Finally, it offers an important statistically testable hypothesis, empirical validation of which might have an important bearing on formulation of development policies in these countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Terms-of-trade shocks, Endogenous labour market imperfection, Shock-absorbing mechanism, Welfare, Developing countries, General equilibrium.
• Subjects: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D59 - Other; D - Microeconomics > D6 - Welfare Economics; D - Microeconomics > D6 - Welfare Economics > D60 - General; F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade Organizations; F - International Economics > F2 - International Factor Movements and International Business; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; J - Labor and Demographic Economics > J4 - Particular Labor Markets > J42 - Monopsony ; Segmented Labor Markets; J - Labor and Demographic Economics > J5 - Labor-Management Relations, Trade Unions, and Collective Bargaining > J52 - Dispute Resolution: Strikes, Arbitration, and Mediation ; Collective Bargaining

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