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Endogenous labour market imperfection, foreign direct investment and external terms-of-trade shocks in a developing economy

Sarbajit Chaudhuri () and Anindya Biswas

Economic Modelling, 2016, vol. 59, issue C, 416-424

Abstract: This theoretical 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 international terms-of-trade disturbances in terms of a static 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. Subsequently, it has been verbally explained why the main result of the full-employment model would remain valid even in a two-sector specific-factor Harris-Todaro type model with urban unemployment. 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 which would pave the way for future empirical research in this area.

Keywords: Terms-of-trade shock; Labour market imperfection; Supply function of FDI; Urban unemployment; Social welfare; Developing countries; General equilibrium (search for similar items in EconPapers)
JEL-codes: D59 D60 F21 F61 J42 J52 (search for similar items in EconPapers)
Date: 2016
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