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Do Developing Countries Possess any Built-in Mechanism that Copes with External Terms-of-trade Shocks?

Sarbajit Chaudhuri ()

MPRA Paper from University Library of Munich, Germany

Abstract: This theoretical note shows that developing countries possess an inherent shock-absorbing mechanism that stems from their peculiar institutional characteristics that 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 analysis leads to a couple of important policies that should be adhered to preserve this in-built system. Finally, it offers an important statistically testable hypothesis, empirical validation of which might have an important bearing on formulation of development policies in these countries.

Keywords: Terms-of-trade shocks; Endogenous labour market imperfection; Shock-absorbing mechanism; Welfare; Developing countries; General equilibrium. (search for similar items in EconPapers)
JEL-codes: D59 D6 D60 F13 F2 F41 J42 J52 (search for similar items in EconPapers)
Date: 2014-08-03
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