Trade with Labor Market Distortions and Heterogeneous Labor: Why Trade Can Hurt
29 Pages Posted: 26 Jul 2002 Last revised: 1 May 2021
Date Written: July 2002
This paper explains the differential impacts of trade on countries in terms of institutional differences which result in factor market distortions. We modify the Ricardian, Specific Factor and Hecksher Ohlin models of trade to capture these. Trade has both terms of trade effects and output effects. Both work to raise welfare in an undistorted economy. In a distorted economy, price effects work to improve welfare, while output effects work to reduce it. Large distorted countries are more likely to lose from trade as beneficial price effects are lower. In addition the greater the substitutability between goods, the more likely it is that welfare rises through trade.
Suggested Citation: Suggested Citation