Optimal Trade Policy in a Ricardian Model with Labor-Market Search-and-Matching Frictions

32 Pages Posted: 12 Mar 2022 Last revised: 20 Feb 2024

See all articles by Wisarut Suwanprasert

Wisarut Suwanprasert

Middle Tennessee State University - Department of Economics and Finance

Date Written: November 9, 2016

Abstract

I develop a dynamic general-equilibrium model that combines the Diamond-Mortensen-
Pissarides labor market with the standard Ricardian model of international trade to investigate
the potential role of unemployment as a justification for trade policy implementation. First, I
compare a competitive equilibrium and a constrained-efficient equilibrium and then establish
the conditions in which the competitive equilibrium is constrained-efficient. Second, I show
that free trade is optimal only when labor market inefficiency is absent. A small open economy
may employ expansionary trade policies (such as export subsidies or reduced import tariffs) if it
experiences inefficiently high unemployment. This study provides a rationale behind countries’
tendency to use export subsidies.

Keywords: unemployment, optimal trade policy, Ricardian model, labor market, search-and-matching frictions

JEL Classification: F13, F16, J64

Suggested Citation

Suwanprasert, Wisarut, Optimal Trade Policy in a Ricardian Model with Labor-Market Search-and-Matching Frictions (November 9, 2016). Available at SSRN: https://ssrn.com/abstract=4014524

Wisarut Suwanprasert (Contact Author)

Middle Tennessee State University - Department of Economics and Finance ( email )

Murfreesboro, TN 37132
United States

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