Munich Personal RePEc Archive

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?

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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.

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