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

39 Pages Posted: 1 Feb 2011

See all articles by Sebastian Galiani

Sebastian Galiani

University of Maryland - Department of Economics

Daniel Heymann

Universidad de Buenos Aires

Nicolás E. Magud

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2010

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-type of 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 trade shift on the economy’s income distribution depends crucially on the use of the tax revenues.

Keywords: Export taxes, Exports, External shocks, Labor productivity, Terms of trade, Trade models

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 (October 2010). IMF Working Papers, Vol. , pp. 1-38, 2010. Available at SSRN: https://ssrn.com/abstract=1750730

Sebastian Galiani (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Daniel Heymann

Universidad de Buenos Aires ( email )

Buenos Aires
Argentina

Nicolas E. Magud

International Monetary Fund (IMF) ( email )

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

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