Endogenous Labour Market Imperfections, FDI and External Terms-of-Trade Shocks in a Developing Economy

Chaudhuri, Sarbajit (2015): Endogenous Labour Market Imperfections, FDI and External Terms-of-Trade Shocks in a Developing Economy.

Abstract

This paper shows that developing countries possess an inherent shock-absorbing mechanism that stems from their peculiar institutional characteristics and 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 supply of foreign capital in the economy is a positive function of the return to capital and a decreasing function of the degree of prevailing restrictions in the economy in the process of free inflow of foreign capital. The analysis leads to a couple of important policies that should be adhered to preserve this in-built system. Finally, it offers three important statistically testable hypotheses, empirical validation of which might have an important bearing on formulation of developmental policies in these countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Terms-of-trade shocks; Endogenous labour market imperfection; Supply function of FDI; Shock-absorbing mechanism; Social 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 > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F6 - Economic Impacts of Globalization > F61 - Microeconomic Impacts; 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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