Sector Specific Inflow of capital, Non-Traded sector and an Increase in Real Exchange Rate

Mandal, Biswajit and Biswas, Anindya (2015): Sector Specific Inflow of capital, Non-Traded sector and an Increase in Real Exchange Rate.

Abstract

This paper attempts to look at the effect of inflow of foreign capital only in the exportable sector on the factor prices and real exchange rate of the concerned economy. In doing so we frame a blend of Heckscher-Ohlin and Specific Factor model of trade which is popularly known as H-O nugget. We show that consequent upon an inflow of capital specific to exportable sector both the non-traded good production and return to the factor specific to non-traded good are reduced while the exportable production expands. The effect of such an inflow on real exchange rate is unambiguous and it increases.

• Item Type: MPRA Paper
• Language: English
• Keywords: Foreign capital inflow, Real exchange rate, Developing economies
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Biswas, A., Mandal, B. and Saha, N., 2014. Foreign Capital Inflow and Real Exchange Rate Appreciation in Developing Economies: Theory and Empirical Evidence. Volume 14 (2014), Issue 3-4, 453–465

Edwards, S., 1989. Real Exchange Rates, Devaluation and Adjustment: Exchange Rate Policy in Developing Countries. The MIT Press, Cambridge.

Gruen, F. and M. Corden., 1970. A tariff that worsens terms of trade. In I. A. McDougall and R. H. Snapes (Eds) Studies in International Economics, Amsterdam,: North-Holland

International Monetary Fund, 2013. International Financial Statistics Databases. Washington, DC.

Jones, R.W., 1965. The Structure of Simple General Equilibrium Models. Journal of Political Economy, 73, 557-572.

Jones, R.W., 1971. A three-factor model in theory, trade and history. In Bhagwati, J et al (Eds) Trade, Balance of Payments and Growth, North- Holland, Amsterdam, 3-21.

Jones, R.W. and S. Marjit., 1992. International trade and endogenous production structure. In Neuefeind, W et al (Eds) Economic Theory and International Trade: Essays in honour of J. Trout Rader, Sringer Verlag.

Jones, R.W. and S. Marjit., 2008. Competitive trade models and real world features. Economic Theory, 41(1), 163-174.

Mandal, B. and S. Marjit (2010), Corruption and Wage Inequality?, International Review of Economics and Finance, 19(1), pp. 166-172.

Mandal, B. and S. Marjit (2012) – Capital Inflow, Vanishing Sector and Wage Distribution in an Economy with Corruption related Intermediation. Economics Bulletin. 32(3), pp 2128- 2135.

Mandal, B. and S. Marjit (2013) – Trade Reform, intermediation and Corruption. Economic Modelling. 33, pp 741-746.

Marjit, S., 2003. Economic reform and informal wage: A general equilibrium analysis. Journal of Development Economics, 72(1), 371-378.

Marjit, S., 2005. Complementarity and International Trade: on some recent development in structural general equilibrium models. In S. Lahiri and P. Maiti (Eds) Economic Theory in a changing world: Policy making for growth. OUP.

Marjit, S., 2008. International Trade and Economic Development: Essays in Theory and Policy, OUP, New Delhi.

Marjit, S and B. Mandal (2012) - Domestic Trading Cost and Pure Theory of International Trade. International Journal of Economic Theory, 8(2), 165-178.

Nowak, J.J., Sahli, M., Sgro, P.M., 2003. Tourism, trade and domestic welfare. Pacific Economic Review 8, 245-258 . World Bank, 2013. World Development Indicators. Washington, DC.