Traded Goods Sector Research Articles

Emigration and Wages in an Open Economy: Some Evidence from Pakistan

"This paper examines the impact of labour emigration on the wages of both the skilled and unskilled workers....Using... Pakistani data, it is found that unskilled labour is used extremely intensively in the agriculture sector (exportable), skilled labour is used extremely intensively in the manufacturing sector (importable), and capital is used as the middle factor in both the traded goods sectors. Moreover, capital is used significantly less intensively in the construction (non-traded) sector relative to both the traded sectors.... The results suggest that the higher wages to both the skilled and unskilled workers must be compensated by a reduction in the rate of returns to capital if export-oriented and import-competing sectors in Pakistan are to remain internationally competitive."

Changes in the U.S. trade specialization: Projections to the year 2000

In this article,factor endowment models of exports and imports are estimated for 46 industries that span the traded goods sector. The regressions are estimated for a pooled sample of 30 countries during the period 1968–1984. Time-series techniques are used to project the endowment vector for the United States, and the projected endowment profile is then combined with the estimated parameters to generate forecasts of the trade pattern for the year 2000. Input-output coefficients are then used to analyze the implications of the trade forecasts for employment in each industry.

PROSPECTIVE CHANGES IN KOREA'S INTERNATIONAL TRADE SPECIALIZATION

AbstractIn this paper, factor endowment models of exports, imports, and net exports are estimated for 46 industries, spanning the traded goods sector. The regressions are estimated for a pooled sample of 30 countries over the period 1968–1984.Time‐series techniques are used to project the endowment vector for each country, and these are then combined with the estimated parameters to generate forecasts of trade patterns for the year 2000.The projected pattern of trade for Korea is examined in detail, and the sensitivity of these projections is investigated.

Prospective changes in Japan's trade pattern

In this paper, factor endowment models of exports, imports, and net exports are estimated for 46 industries, spanning the traded goods sector. The regressions are estimated for a pooled sampled of 30 countries over the period 1968–1984. Time-series techniques are used to project the endowment vector for each country, and these are then combined with the estimated parameters to generate forecasts of trade patterns for the year 2000. The projected pattern of trade for Japan is examined in detail, and some simple simulations are discussed.

Traded Goods, Competitiveness and Aggregate Fluctuations in the United Kingdom

This paper presents an investigation of the relations between wage adjustment, competitiveness, and aggregate fluctuations in the United Kingdom. It uses a real business cycle model based on the distinction between internationally traded and nontraded goods. The traded goods sector is assumed a price taker, and the focus is on the supply side. The model can account quite well for fluctuations in competitiveness, output, wages, and the terms of trade. The results suggest output flexibility and wage-price rigidity, a combination that produces interesting patterns of macroeconomic adjustment, which parallel the predictions of more traditional Keynesian models. Copyright 1990 by Royal Economic Society.

DOES EXCHANGE RATE APPRECIATION ‘DEINDUSTRIALIZE’ THE OPEN ECONOMY? A CRITIQUE OF U.S. EVIDENCE

This paper takes a critical look at the conventional view that the dollar exchange rate appreciation during the early 1980s caused a major resource shift in the U.S. economy away from tradables production, such as manufactures, toward nontradables production. We argue that the association of a dollar appreciation with relative strength or weakness in the tradable goods sector depends on the particular shock causing the appreciation, and consequently that the relation between exchange rates and the sectoral composition of output is unlikely to be stable over time. Our empirical analysis finds evidence of instability in the exchange rate–sectoral output link and of a positive association between tradables output and fiscal stimulus.

Real exchange rate changes as a cause of protectionism

In this article, the various ways in which a real appreciation of the exchange rate can induce an increase in the overall or sector-specific level of protection are surveyed. In a normative framework, a real appreciation can justify temporary government interference, including trade policy, aimed at protecting (part of) the traded-goods sector. In addition, a positive approach of political decision-making on protection has been applied in order to explain actual government behaviour. After a real appreciation the balance of influence between the interest groups involved will change in such a way that an increase in the level of protection results.

Exchange rate policy, wage formation and credibility

Since the collapse of the Bretton Woods system, some European countries have pursued discretionary exchange rate policies in order to maintain or enhance the international competitiveness of the traded goods sector. These countries, which typically feature centralized wage setting, have also tended to experience high nominal wage increases. The overall outcome may be described as a ‘devaluation-wage spiral’. This paper applies two models of repeated games to analyze the strategic interaction between an exchange rate setting policy maker and a wage setting trade union. It is shown how a devaluation-wage spiral may result from a conflict of interest over the real wage. It is also shown how reputational forces may provide a way out of the devaluation-wage spiral.

Macro-Economic Stability and Policy Rules in a Two-Sector Model of an Open Economy

Purchasing power parity exchange-rate rules are often used in open economies to stabilize the demand for exports and domestic output. R. Dornbusch (1982) shows tha t such rules may increase the variability of output via the supply si de by destabilizing the price of imported intermediate goods. Here a two-sector, wage-spillover model is employed to demonstrate that this result is more likely because although exchange-rate indexation woul d decrease the variability of output in the traded goods sector, it m ay increase the variability of output in the nontraded goods sector a nd in the aggregate via the wage linkage between sectors.

Nigeria During and After the Oil Boom: A Policy Comparison with Indonesia

Nigeria and Indonesia provide an interesting contrast with regard to performance and policy during and after the oil boom. Roughly a decade after the first oil shock, Nigeria is faced with several economic problems including a serious decline in its agricultural sector and a deteriorating external debt situation. While some decline in the nonoil traded goods sector reflects efficient adjustment to the oil boom, policy with regard to public expenditure, exchange rates, pricing, and the trade regime could exacerbate such decline and impede readjustment as the boom subsides. The links between oil prices, deficits, inflation, and real exchange rate appreciation are analyzed and Nigerian and Indonesian fiscal and exchange rate and agricultural and foreign borrowing strategies are compared. It is concluded that with the exception of cuts in the deficit since 1984, Nigerian policy following the boom has not been conducive to adjustment to the current period of low oil prices and high real interest rates. Corrective measure and policy options are discussed. A postscript gives post—September 1986 policy changes.

Human Capital, Minimum Wage and Unemployment: A Harris-Todaro Model of a Developed Open Economy

In many developed countries unemployment is a serious and persistent problem. Although the character of this problem is highly complex, one of its features which can easily be observed is the substantially higher incidence of unemployment among unskilled workers than among those who are skilled. A possible explanation for this is the existence of an institutionally given minimum wage, which exceeds the market-clearing wage for unskilled labour but lies below the equilibrium wage for skilled labour. Moreover, for those who find themselves unemployed because of the minimum wage, the principal source of job opportunities tends to be the services sector of the economy, which is relatively intensive in its use of unskilled labour. The objective of this paper is to develop a simple model of a small, open economy based on these observations and to examine the policy implications that emerge from it in connection with the unemployment problem. The focus of the analysis, however, is not on the cyclical aspects of this problem but rather on its steady-state nature. The basic structure of the model is as follows. Our economy has two sectors engaged in the production of consumption goods. One of these goods is assumed to be traded internationally and the other is non-traded. Following Rodriguez (1975), I draw a further distinction between the two sectors: nontraded goods, which may be regarded as services, are assumed to require the use of only capital and unskilled labour as inputs, while the traded-goods sector uses only capital and skilled labour. Skills are viewed as productive human capital which can be acquired through formal training. In order to sharpen the focus of our analysis on the process of human capital formation, I will ignore the problems of physical capital accumulation and population growth.' The economy is assumed to be small, facing a given world price of traded goods as well as a given rental at which the supply of capital from abroad is infinitely elastic. In contrast with the assumption of perfect capital mobility, neither type of labour is mobile internationally. With only one traded commodity and one mobile factor, international trade for this economy amounts to an exchange of the single traded consumption good for the services of capital at fixed terms of trade. Section I of the paper presents the model and solves for the stationary composition of the labour force (i.e. skilled v. unskilled) and the equilibrium values of relative factor and commodity prices. Section II introdluces an institutionally given minimum wage which is binding only in the market for unskilled labour. In the spirit of Harris and Todaro (1970), it is assumed that

The London Business School with Gower Publishing

The theory of employment is reasonably well understood. Producers are confronted with a given level of aggregate demand. They decide how much they can profitably produce, and decide on the mix of capital and labour in response to a given set of relative prices. Over most of the post‐war period variations in employment were accounted for mainly by variations in aggregate demand, but that situation changed dramatically during the 1970s. As unemployment has mounted, so has the interest in so‐called supply‐side explanations of the problem, since it has become obvious that an increase in employment on the scale required can hardly come from a demand stimulus alone.In our account of the 1980 recession, we tended to focus on profitability as a key element in the decision to supply. If the price of goods is too low relative to the price of the factors of production needed to produce them, then the supply of output will fall. In the 1980 recession the price of all the factors of production rose dramatically: real wages shot up following the Clegg awards; real interest rates were at record levels; and the price of energy had recently soared following the OPEC II oil shock. At the same time goods prices were being constrained by the government's counter‐inflationary strategy, and most notably by a strong exchange rate.Under these circumstances a substantial proportion of firms, especially in the traded goods sector, found it unprofitable to continue producing. When unprofitable production lines were abandoned, the associated capital equipment was scrapped. These decisions, once taken, were for the most part irreversible even if, as must have happened in some cases, subsequent movements in factor prices would have made production profitable once again. We discussed this phenomenon in the April Forecast Release and showed that, on the assumption that capital‐labour ratios had remained at their trend levels, some £25bn of capital equipment (at I980 prices) had been scrapped. The fact that manufacturing output and employment have remained far below their 1979 levels, even though total output at home and abroad is at or well above that level is, we believe, mainly due to this capital scrapping. The jobs in manufacturing will not be re‐created ‐ even though UK competitiveness has been restored to pre‐1980 levels ‐ until the capital stock is re‐built.The scrapping phenomenon is important because it creates a link between employment and too‐high real wages (or other factor costs) that is often ignored. In standard production theory a rise in real wages leads to the substitution of capital for labour and employment may fall (if the rive in real wages does not create a more than offsetting increase in aggregate demand). However, production theory is complicated by the fact that capital and labour are complements as well as substitutes. Since a large part of the nation's productive‐capacity, once built, uses capital and labour in fixed proportions, a rise in real wages may render part of the existing capital stock uneconomic. High real wages thus destroy capital as well as jobs.In our April Forecast Release, in order to estimate the scale of the scrapping problem, we made the simplifying assumption that capital‐labour ratios remained on trend. In practice they vary in line with movements in relative factor prices. In the present Forecast Release we look more closely at the role of factor prices. We find some evidence that changes in relative factor prices affect the capital‐labour mix. However, the substitution elasticities are small. The conclusion of this analysis is that the job losses which resulted from too‐high factor prices (mainly wages) during the recession cannot be quickly reversed.

Optimal Capital Accumulation and the Allocation of Investment between Traded and Nontraded Sectors in Oil-Producing Countries

How should oil-exporting countries allocate revenues from the production of oil over capital accumulation and consumption? How should investment be allocated over traded and nontraded sectors? Most oil-exporting countries are confronted with the problem of maintaining or developing a nonoil traded goods sector because higher oil revenues lead to a high real exchange rate, thereby pulling resources into the nontraded sector-the so-called Dutch disease. The optimal savings response and investment allocation to temporary and permanent increases in oil revenues are derived in this paper.

Inflation, Employment, and the Dutch Disease in Oil-Exporting Countries: A Short-Run Disequilibrium Analysis

The author uses nontraded goods and labor shortages in the Gulf countries, the decline of the traded goods sector in oil producers (''Dutch Disease''), and the absence of employment benefits of higher oil revenues in Latin American oil producers. Higher oil revenues can be likened to a transfer putting pressure on non-oil traded (NT) goods prices and drawing resources out of the T sector. The slope of the wage indexation line determines whether classical unemployment or repressed inflation results. Various policy measures are analyzed. 3 references, 8 figures.

The Current Account of the United States, Japan, and Germany: A Cyclical Analysis

The current account positions of the major industrial countries have undergone very large swings in the past three years. Most observers now expect the U.S. current account, which was in surplus in 1981, to show a record deficit in 1983, and an even larger deficit in 1984. Swings in the Japanese and German current accounts have been equally dramatic in the opposite direciton, moving from deficit to surplus. The possible continuation of these deficits is a source of concern to policymakers to the extent, for example, that they and factors underlying them give rise to protectionist pressures or involve significant adjustment costs in tradable goods sectors.

Oil export boom and Dutch-disease: A dynamic analysis

This paper analyzes the extent to which a boom in a particular export sector (i.e., oil) affects competitiveness in the rest of the economy: This problem has sometimes been associated with the so-called ‘Dutch-disease’. The main conclusion of the analysis is that the ‘Dutch-disease’ is not a disease in any clear sense. It is shown that in a non-monetary economy a (permanent) increase in the price of oil will result in an equilibrium reduction of the price of traditional (non- oil) tradables both in terms of non-tradables and oil. This is a long-run real phenomenon that will result in resources moving out of the traditional tradable goods sector. It is also shown that if money is included into the model it is possible that relative prices will overshoot, and that the traditional tradables sector will have a greater loss of competitiveness in the short-run than in the long-run. Finally, the paper discusses some policy measures that will help avoid this relative price overshooting.

Booming Sector and De-Industrialisation in a Small Open Economy

This paper presents a theoretical analysis of the 'Dutch Disease': the phenomenon whereby a boom in one traded goods sector squeezes porfitability in other traded goods sectors, both by directly bi ...

Changes in the size of the traded goods sector: Theory and applications

This paper first presents price-quantity data for traded and nontraded goods in the U.S. and Australia. In the U.S. from the early 1950s to the early 1970s, the relative size of the traded goods sector (as measured by its share in total expenditure) fell by 10 per cent; in Australia over roughly the same period it fell by 36 per cent. This decline is analysed with a consumer demand model, which enables us to decompose the change in the size of this sector into a number of components for each year. The fall in the relative price of traded goods accounts for a substantial part of the decline in this sector in both countries. In addition, changes in tastes away from traded goods is an important factor for Australia.

Dividend Policy and Capital Market Theory: A Comment

as regards the relative strengths of the coefficients of the exporting versus importing countries. The results of equation (2), while interesting, may be weak because of the crude nature of the restriction data and the possible inappropriate grouping of the restriction data according to mode of operation.7 Equation (1) is quite credible in the sense that a count of the existence of up to 12 possible restrictive practices could give an indication of a country's tendency to contract its traded goods sector by various policy measures. However, it is not surprising that an attempt to disaggregate this type of data into three separate variables in equation (2) was less successful. The regression results indicate that country practices restricting exchange rates, trade, and payments do affect trade flows among OECD countries. The fact that relatively significant results were obtained with very crude data suggests that bilateral trade flow models should include variables measuring these practices. Perhaps future reas regards the relative strengths of the coefficients of the exporting versus importing countries. The results searchers will attempt to create better quantitative measures of these types of restriction practices.

Short-term policy in open semi-industrialized economies: The narrow limits of the possible

This paper develops a model to analyze short-term policy alternatives in semi-industrialized countries. The major points raised are the following: (i) There are two sectors, producing traded and non-traded goods. The latter is characterized by a fairly low elasticity of substitution and a high relative labor share. If the elasticity of substitution in the traded goods sector has an econometrically reasonable value, then short-run improvements in both the labor share and real income may well call for revaluation of the exchange rate and an increase in home good's price (prices of both goods being measured in wage units). (ii) If excess supply functions have Walrasian stability, such price changes will lead to deterioration in the balance of payments: On the other hand, devaluation-induced improvement in the balance of payments (with constant government expenditure) can lead to an improvement in real income, but reduces the labor share. (iii) If the economy is formally unstable, due to capitalists and laborers concentrating their expenditure demands respectively on the goods intensive in factor payments to themselves, then balance of payments improvement in a comparative static analysis may entail reductions in both real income and the labor share. (iv) If the additional realistic assumption is made that elasticities of excess supply functions for the two goods with respect to the interest rate are quite low, then in general improvement of all three targets (real income, balance of payments, and income distribution) will be unattainable. If in addition the government cannot finance expenditure changes by anything but money supply changes, then in general only one target variable can be attained. (v) Numerical sensitivity analysis based on Chilean data indicates that these (and other) rather pessimistic results hold for fairly wide ranges of ‘plausible’ parameter values, as long as the model's short-run Keynesian assumptions are maintained.