Terms of Trade, Labor Supply and the Current Account

Yao-Nan Hsu ()
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Yao-Nan Hsu: Department of Economics, Ming Chuan University, Taiwan

Journal of Economics and Management, 2015, vol. 11, issue 1, 101-126

Abstract: This paper studies the effect of the terms of trade on labor supply, industrial capital adjustment and the current account in a two-period small open economy in which endogenous labor supply is considered and labor is assumed to be mobile between sectors, given the situation that capital is a sector-specific factor in the short run but is mobile between sectors in the long run. In this setup, the effect of a permanent deterioration in the terms of trade on the current account will depend on the industry capital-labor ratio. This is due to the assumption of an elastic labor supply, short-run capital specificity, and long-run capital mobility between sectors. A temporary deterioration in the terms of trade on the current account is also ambiguous, since it is both a temporary deterioration in the terms of trade that reduces real income, and it also has an uncertain effect on the real wage due to the short-run fixed capacity result of the indeterminate labor supply in the two periods.

Keywords: terms of trade; current account; Harberger-Laursen-Metzler effect (search for similar items in EconPapers)
JEL-codes: F21 F32 F41 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:jec:journl:v:11:y:2015:i:1:p:101-126

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