On the Distributive Effects of Terms of Trade Shocks: The Role of Non-Tradable Goods

35 Pages Posted: 8 Jan 2009 Last revised: 4 Jun 2017

See all articles by Sebastian Galiani

Sebastian Galiani

University of Maryland - Department of Economics

Daniel Heymann

United Nations

Nicolás E. Magud

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2009

Abstract

We introduce non-tradable goods to the Heckscher-Ohlin-Samuelson (HOS) model to study the distributive effects of terms of trade shocks. We show that the employment of resources in activities producing exclusively for the local market induces a crucial association between domestic spending and factor demand and prices, which is absent in the usual HOS framework. Specifically, in a two-sector economy (producing only exportable and non-tradable goods) there are no redistributive effects of external terms of trade shifts {i.e. no Stolper-Samuelson effect. By extending the model to the domestic production of a third, importable good, we show that distributional tensions arise. Distributional conflicts occur within urban labor groups (skilled vs. unskilled) and not only between the "traditional" rural vs. urban factors. Finally, export taxes are imposed to re-distribute the effects of external shocks. We show that the ability of the government to cushion the impact of the terms of terms shift on the economy's income distribution depends crucially on the use of the tax revenues.

Keywords: Non-tradable goods, terms of trade shocks, distributive conflict, export taxes

JEL Classification: F11, O1, Q34

Suggested Citation

Galiani, Sebastian and Heymann, Daniel and Magud, Nicolas E., On the Distributive Effects of Terms of Trade Shocks: The Role of Non-Tradable Goods (November 2009). Available at SSRN: https://ssrn.com/abstract=1324243 or http://dx.doi.org/10.2139/ssrn.1324243

Sebastian Galiani

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Daniel Heymann

United Nations ( email )

New York, NY 10017
United States

Nicolas E. Magud (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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