Intersectoral adjustment and unemployment in a two-country Ricardian model

Didier Laussel (), Philippe Michel and Thierry Paul
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Thierry Paul: GREQAM / IDEP et Université de la Méditerranée

No 2004023, Discussion Papers (REL - Recherches Economiques de Louvain) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: In a two-country Ricardian model, we study the dynamics of intersectoral reallocation of labour following upon a once and for ail move to free trade. The job creation/destruction process in both sectors is slow and this results in unemployment during the transition toward the long run free trade equilibrium. We identify different free trade regimes depending on whether or not the world relative price is between the two autarkic prices. In some regimes, one of the two countries overshoots its autarkic equilibrium i.e. temporarily specializes according to its comparative disadvantage. In that case, welfare increases in both countries. In other regimes, the adjustment process is monotonie in both countries but welfare increases in only one country. When the two countries have "very" different rates of job creation/destruction, the world price adjusts in such a way that the difference in adjustment speed between the two countries decreases.

Keywords: Comparative advantage; Adjustment process; Interdependent countries (search for similar items in EconPapers)
JEL-codes: F11 F16 O19 (search for similar items in EconPapers)
Pages: 24
Date: 2004-06-01
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