Endogenous Labour Market Imperfections, FDI and External Terms-of-Trade Shocks in a Developing Economy

Sarbajit Chaudhuri

MPRA Paper from University Library of Munich, Germany

Abstract: This 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 exogenous terms-of-trade disturbances in terms of a 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 and a decreasing function of the degree of prevailing restrictions in the economy in the process of free inflow of foreign capital. 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, empirical validation of which might have an important bearing on formulation of developmental policies in these countries.

Keywords: Terms-of-trade shocks; Endogenous labour market imperfection; Supply function of FDI; Shock-absorbing mechanism; Social welfare; Developing countries; General equilibrium. (search for similar items in EconPapers)
JEL-codes: D59 D6 D60 F21 F61 J42 J52 (search for similar items in EconPapers)
Date: 2015-01-25
New Economics Papers: this item is included in nep-int
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