Non-traded Goods Research Articles

Inequality and the structure of countries’ external liabilities

In this paper, we present empirical evidence that higher income inequality is associated with a greater equity share in countries’ external liabilities, and we develop a theoretical model that can explain this observation: In a small open economy with traded and non-traded goods, entry barriers depress entrepreneurial activity in non-traded industries and raise income inequality. The small number of domestic non-traded goods firms leaves room for foreign firms to operate on the domestic market, and it reduces external borrowing. The model thus suggests that barriers to entrepreneurial activity raise both inequality and the equity share in foreign liabilities. Our empirical results lend some support to this conjecture.

Fiscal policy, macroeconomic performance and industry structure in a small open economy

We analyse how fiscal policy affects both the macroeconomy and the industry structure, using a multi-sector macroeconomic model of the Norwegian economy with an inflation targeting monetary policy. Our simulations show that the magnitude of the government spending and labour tax cut multipliers, whether monetary policy is active or passive, is comparable to what is found in the literature. A novel finding from our simulations is that the industry structure is substantially affected by an expansionary fiscal policy, as value added in the non-traded goods sector increases at the expense of value added in the traded goods sector. Moreover, expansionary fiscal policy reduces the mark-ups in the traded goods sector, while the mark-ups are roughly unchanged in the non-traded goods sector. The contraction of activity in the traded goods sector increases when monetary tightening accompanies the fiscal stimulus. Hence, we find that such a policy mix is likely to produce significant de-industrialization in a small open economy with inflation targeting.

Monetary Policy and Net Exports Externalities in the Small Open Economy

AbstractWe extend a New Keynesian small open economy dynamic stochastic general equilibrium (DSGE) model with nontradable goods and intermediate inputs. We show that the optimal monetary policy in the small open economy is not necessarily isomorphic to the closed economy due to net exports externalities. The optimal policymaker is willing to take advantage of the externalities and to raise the real value of home production, along with stabilizing composite domestic inflation. Also, we rank alternative monetary policy rules, estimate the optimal monetary policy rule associated with welfare, and show that setting interest rates toward their target levels of composite domestic inflation and net exports is desirable.

Import intensities of final demand components and their implications for economic openness: The case of the Czech Republic

AbstractThe article deals with the estimation of import intensities of exports, final consumption expenditures and gross fixed capital formation. It uses the input-output methodology of computing direct and indirect imports to the final demand components, which compares with regression estimates. Unlike the widely used turnover approach, the results contribute fundamentally to knowledge about the genuine openness of the Czech economy with regard to how much value-added is exported. In 2015, the highest import intensity for exports amounting to 52%, closely followed by 49% for investments. Household consumption worked with 41% import intensity, while general government consumption expenditures showed the lowest import intensity of 16%. Based on our input-output findings, the true openness of the Czech economy can be revealed. While turnover of exports to GDP reached 80% in 2019, the value-added approach showed only a half, i.e., 40% value-added was exported. It implies a contra-intuitive conclusion that even in a relatively small and highly integrated country into the globalized economy, there is a 60% majority of the non-tradeable goods.

Exchange rate policy and heterogeneity in small open economies

This paper studies the role of exchange rate regimes in shaping the distributional effects of external monetary shocks. I model a small open economy where agents differ in wealth and in exposure to international trade, producing either tradable or non-tradable goods. The central bank responds to a foreign interest rate hike by a monetary tightening to stabilize the exchange rate or lets the currency depreciate, keeping the interest rate low. I find that exchange rate flexibility distributes consumption gains to the poorer agents. The monetary tightening required to stabilize the currency disproportionately affects their disposable income through interest payments on loans and falling wages. Attempts to fix the exchange rate increase consumption inequality. Flexibility also benefits the non-tradable sector because conditions in this sector are more sensitive to domestic demand and sharply deteriorate when domestic interest rates rise.

Does dollarization promote trade? Evidence from two recent episodes

ABSTRACT We quantify the trade-promotion effects of sharing a common currency by examining two recent episodes of official dollarization. To establish causal relationships, while avoiding the methodological criticisms of the previous literature on the issue (endogeneity and heteroskedasticity), we employ a differences-in-differences strategy that compares the pre- and post-dollarization trade flows between the United States and the two dollarizers (Ecuador and El Salvador) with the trade flows between the United States and the dollarizers’ neighbours. We find that the adoption of the dollar did not bring about any significant positive trade effects. Using product-level data we find that, while a few sectors saw positive increases, those instances are scattered and not the norm. Dollarization did not lead to increases in trade of previously non-traded goods either. Finally, we do not find any trade-promotion effects between Ecuador or El Salvador and the other dollarized country in the region (Panama) or between the newly dollarized countries themselves. These findings remain valid after we perform a battery of robustness tests, including PPML estimation.

Does Tourism Growth Influence Destination Residents’ Welfare in China? The Mediating Effect of Cuisine Diversity

This paper examines whether tourism can improve the diversity of cuisine and destination residents’ welfare. We constructed a theoretical model of tourism development-driven diversified welfare and found that, in open cities which receive tourists, non-tradable goods can be diversified by tourism development, which can enhance residents’ welfare. We further used cuisine diversity as a proxy of the diversity of non-tradable goods and established a panel dataset. Regression results indicate that tourism intensity positively influences cuisine diversity and welfare. The impact of tourism intensity on welfare can be realized through the mediating effect of cuisine diversity. Our findings remain robust after robustness checks, and subsample analysis shows that the positive impact of tourism on welfare is more remarkable in urban destinations with limited resources for tourism development and undeveloped cities.

Remittances and Dutch Disease in India: An Empirical Investigation using ARDL

Workers' remittances are an essential source of capital flows. Some authors considered workers' remittances to be the least volatile flow of capital. Therefore, it becomes all-important to evaluate the impact of workers' remittances and other economic variables on the Real Effective Exchange Rate of Indian currency using annual time series data from 1981 to 2018. Using the Autoregressive Distributed Lag bounds test, our results confirmed the long-run association of variables under study. Empirical findings suggested that remittance inflows appreciate the REER in both the long and short run. Using ARDL estimation, our results found evidence of Dutch disease in the Indian economy induced by inflows of workers' remittances. Regarding other control variables, the only determinant of REER was Terms of Trade, which depreciated the REER in the long and short run. In contrast, other variables only depreciated in the long run. We conducted the Error Correction Model test, revealing that REER converged to the long-run equilibrium path to 40 per cent of the time in successive periods. Also, our results recommend that the inflows of remittances should be formally channelized to some productive channels to reduce the consumption of non-traded goods. Keywords: ARDL, Dutch disease, error correction model, real effective exchange rate, workers' remittances. JEL Codes: C01, F24, F31

A Monetary Model of Inflation for Bangladesh, 1974-1985

A model of inflation for Bangladesh is developed and estimated for the period 1974:2-1985 :4, in line with the monetary approach and based on the hypothesis that any disequilibrium in the real money-market adjusts itself through changes in the price level, but not instantaneously. Changes in the prices oftraded gooas in the international market, real permanent income, real money stock, one period lagged rate of inflation, and changes in the terms of trade between traded and non-traded goods are found to be the major determinants of inflation in Bangladesh.

Tourism Promotion and Regional Development in Low-income Developing Countries

There are not so many papers that the economic effects of tourism are examined in a general equilibrium framework. The features of those papers are that they assume that tourism is regarded as non-tradable goods and services and that tourism is consumed by not only foreign tourists but also domestic residents. However, since our purpose of this paper is to examine the economic effects of tourism promotion on low-income developing countries, we assume that most domestic residents cannot afford to consume tourism, which is considered as a luxury good. Under such assumptions, we examine the effects of two tourism promotion policies on a developing economy. The main result we obtain is that both the policies improve the standard of living for the farmers in a rural region while they worse the standard of living for the workers who are employed in an urban region.

Farzana Naqvi. Energy, Economy and Equity Interactions in a CGE Model for Pakistan. Aldershot: Ashgate Publishing Company, 1997. Hardbound. Price not given. xxii+290 pages.

Modernisation of the agricultural, industrial and household sectors causes the demand for energy to increase more rapidly than its supply. In countries that aim to modernise quickly a heavy investment is required to redress this imbalance. That is why in countries such as Pakistan, the energy has remained on the top of the agenda of loan negotiation with international donor agencies. Energy serves as both a final consumption good and as an essential intermediate input in the production of goods. Thus any change in the price of energy at both these levels affects consumption as well as production and that, in turn, can cause changes in the prices of all other commodities. A change in the prices of exportables affects their demand in foreign markets and any change in the prices of import-competing and nontraded goods affects their demand at home. The net effects of all these changes can be measured in terms of the effects on real GDP, balance of trade, and government revenue. And, because any change in commodity prices exerts a negative impact on real consumption of households; the formulation of a comprehensive energy policy requires a framework that can take the immense complexity of the linkages of all the sectors of the economy into consideration. In the book under review, Dr Farzana Naqvi, argues that the issues of energy pricing can not be examined in isolation and presents a general equilibrium framework to address the complex issues related to energy, economy and equity.

Consumer expenditure structure: Analysis based on extended linear expenditure system

This study has analyzed the consumer demand and expenditure structure of commodities concerning the income of the sampled households using the Extended Linear Expenditure System Model. Budget shares and expenditure elasticities were estimated for household consumption categories allowing for a comparison of expenditure elasticities between the two seasons. Expenditure elasticities for consumer expendables, durables, and transport were highly elastic. Tradable and non-tradable non-farm goods are highly expenditure elastic indicating that an increase in household income will result in a proportionately greater increase in expenditure on it. Increased expenditure on non-tradable goods and services may stimulate local production and create new employment and enterprise opportunities, while the increased expenditure on tradable goods represents a leakage of income from the local economy. An increase in farm incomes has the potential to stimulate economic growth through the stimulation of increased local production of non-farm goods and services. Increased income will also result in increased expenditure on goods not locally produced, which means leakage of income from the local economy. Increased production is limited by factors such as insecure tenure and cash flow problems that are amplified by high transaction costs associated with obtaining credit. Better access to credit would improve cash flow problems somewhat, but transaction costs need to be lowered through the improvement of physical and institutional infrastructure. Demand-led growth needs to be strengthened with the production of goods not currently produced. Processing raw food materials into more convenient items would encourage increased local expenditure with increased income and possibly reduce the leakage of income from the local economy. The diversification into non-farm activities such as product processing requires investment and poses a risk. Insecure tenure creates a disincentive to investment as producers are not guaranteed the benefits from their investment. Public policy should focus on alleviating tenure security and institutional infrastructure to strengthen the potential for demand-led growth. These results may be valid for any underdeveloped/developing agrarian regions or economy of the globe.

Reverse migration and exports at extensive margin: case of a small dependent economy.

We analyse the implications of reverse migration on export quality upgrading by the origin country. Other than a favourable endowment shock by raising the native country's labour supply, reverse migration cause loss of remittances from unskilled emigrants and capital investments made by skilled emigrants. Resulting loss of national income and correspondingly domestic demand affect local factor prices and consequently the competitiveness of exports, when the economy produces non-traded goods. In a competitive general equilibrium model of a small open economy, we establish that reverse migration of unskilled workers will cause upgrading of quality of the skill-based export good only if higher qualities require more capital relative to skilled labour. Reverse migration of skilled workers has just the opposite effect. Lower contribution to capital investment thereby lower capital stock and lower repatriation of returns to such investment further magnify such effects. Finally, the results are robust to a more generalised demand structure.

City Size and Household Consumption in China

Agglomeration and dispersion forces fundamentally determine urban and regional development. While traditional views on agglomeration forces are primarily from a production perspective, the growing literature focuses on the consumption perspective and suggests that larger cities may generate better consumption amenities. This paper joins the discussion by examining whether and to what extent city size increases household expenditure on such non-tradable goods and services, as restaurants, entertainment, health and fitness, housekeeping services and clothes. We hypothesize that city size raises the marginal utility of these consumers by increasing the variety of their products or services, supporting certain sectors that have substantial scale economies, or expanding the number of their specialized retail stores, so that households in larger cities want to spend more on these items. The data we use are from the China Household Finance Survey that documents the income, expenditure and demographic information of more than 8000 households from 85 cities in 2011, 2013 and 2015. Our results indicate that city size significantly raises household expenditure on restaurants, entertainment and health and fitness. These sectors have either quite differentiated products or services, or significant fixed costs, so that they rely heavily on scale economies.

Price levels in the European Monetary Union: Even tradables follow independent random walks

This study analyzes the time series behavior of real exchange rates between member states of the European Monetary Union. The analysis is based on the Harmonized Index of Consumer Prices and eight sub-components for tradable and non-tradable goods and services. Stationarity of the real exchange rates is a necessary condition for long-term convergence of price levels. The results of pairwise tests show that the real exchange rates, resulting from these price levels are typically random walks and their components are generally not cointegrated. There is no evidence of the existence of country-specific convergence clusters. A systematic difference in the results for tradable and non-tradable goods cannot be detected.

Non-homothetic sudden stops

The expenditure elasticity of the demand for nontradable goods is higher than the one for tradable goods. We extend the small open economy model of Sudden Stops of Bianchi (2011) allowing for non-homothetic preferences to generate this difference. Analytic results for an endowment economy show that, during crises, the non-homotheticity amplifies the decrease in the demand for the nontradable good, triggering a sharper deflation spiral that ultimately leads to a more severe current account reversal. The amplified pecuniary externality calls for more aggressive debt taxes. An extended version of the model with production and permanent productivity shocks shows that non-homothetic preferences can also amplify the credit booms that precede Sudden Stops. The amplification is particularly large when the consumption boom is biased toward nontradable goods. Macroprudential policy shows, not only quantitative, but also qualitative differences in its reaction to shocks under preference non homotheticity.

Welfare and sectoral productivity shifts in a small open economy with imported agricultural inputs: The case of Sub-Saharan Africa

This paper studies the impact of sectoral productivity growth on welfare in Sub-Saharan Africa. Using the analytical framework of a DSGE model, the main finding is that, for the estimated values of structural parameters, the allocation of scarce resources to the tradable agricultural sector for boosting productivity leads to a greater increase in overall welfare than would be the case if they were allocated to the non-traded goods sector.

Internal structure of consumer cities: Core and subcenters

AbstractThis study examines urban spatial structures with production externalities as well as agglomeration from consumption amenities. Two agglomeration forces interact in consumer cities where a variety of nontradable goods facilitate consumption. I show that higher urban density begets not only more efficient production but also more varieties for consumers to enjoy. Hence, an urban structure depends on the tension between firms and consumers to take advantage of urban density. As a result, production externalities may cause decentralization from the central business districts, reflecting suburbanization. On the other hand, consumer trips play a role in centralization to the market centers. Accordingly, the consumption agglomeration in big cities sheds light on the reexamination of the significance of city cores.

Non-traded goods, factor market frictions, and international capital flows

The canonical one-sector model over predicts international capital flows by a factor of ten. We show that introducing a non-traded goods sector can reconcile the differences between the theoretical predictions and the observed flows. We analyze the quantitative impact of the non-traded sector using a calibrated model of a small open economy, in which non-traded goods are used in consumption and investment, and need capital and labor to be produced. The model features international frictions directly affecting international borrowing and lending, as well as domestic frictions that limit the scope of inter-sectoral reallocation of capital and labor. We find that: (1) the impact of domestic frictions on the size of international capital flows is similar to the impact of international frictions, and (2) the median elasticity of capital flows with respect to international frictions in the two-sector model with costly inter-sectoral reallocation is about 50-60% lower than that same elasticity in the one-sector model.

Trade, Structural Transformation, and Development: Evidence from Argentina 1869–1914

We provide new theory and evidence on the role of external and internal integration in structural transformation and economic development, using Argentina’s integration into the world economy in the late nineteenth century. Our theoretical model provides microfoundations for a spatial Balassa-Samuelson effect, in which locations closer to world markets have higher population densities, urban population shares, relative prices of nontraded goods, and land prices relative to wages, as well as specializing in traded goods that are transport-cost sensitive. We estimate the model’s parameters, provide evidence in support of this spatial Balassa-Samuelson mechanism, and find substantial effects of both external and internal integration on economic development.