Abstract
An acute shortage of foreign exchange has been a recurring problem for many developing economies. This paper reexamines the foreign exchange gap issue and the debate between structuralists and neoclassicists by providing a quantitative assessment of the role of different assumptions about the values of key trade elasticities. It also seeks to complement the existing descriptive analysis of the consequences of alternative adjustment mechanisms with a quantitative analysis that indicates the relative importance of different behavioural assumptions and policy regimes. The empirical analysis is based on a computable general equilibrium model which is Walrasian in spirit and captures price mechanisms, market interactions, and structural interdependence in a non-linear multisector framework. The analysis lends support to the structuralist view that it is not sufficient to look at problems of adjustment only at the macroeconomic level.
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