Working Paper: CEPR ID: DP61
Authors: J. Peter Neary
Abstract: This paper presents a non-technical introduction to the analysis of how an open economy adjusts to exogenous shocks. Three alternative models of adjustment are considered, each one appropriate to a different time horizon: the specific-factors model with transitional unemployment for the short run; the Heckscher-Ohlin model with temporary capital specificity for the medium run; and a new model of growth and structural change for the long run. Consideration is also given to the choice of policies towards the adjustment process, from both a welfare economic and a political economy perspective.
Keywords: adjustment; structural change; international trade theory; short-run vs long-run
JEL Codes: 111; 411
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exogenous shock (F41) | transitional unemployment (J64) |
| exogenous shock (F41) | wage differentials between sectors (J31) |
| capital reallocates from declining to expanding sectors (E22) | changes in equilibrium wage rates (J39) |
| declining sector is labor-intensive (J21) | steady fall in equilibrium wages (J31) |
| structural changes (L16) | elimination of entire sectors (L52) |