Scientific article

Unemployment, real exchange rate and welfare in a model with specific factors and non-traded goods

Published inInternational Review of Economics & Finance, vol. 6, no. 2, p. 203-218
Publication date1997

This paper analyses the impact of the formation of a customs union on unemployment, real exchange rate, structural adjustment and welfare in both the member and non-member countries. The analysis is conducted on the basis of an asymmetric model of multilateral trade. These countries are involved in trade and two countries form a customs union. Unemployment is generated from the assumption of a minimum real wage rate set above the competitive level. On the basis of this model many interesting results are obtained. First, it is established how different minimum wage rates in different countries lead to non-equalization of factor prices. More importantly it is demonstrated that the prevalence of such wage rates necessarily gives rise to different prices for non-traded goods and services in the countries under consideration. It is also shown that the country with the highest minimum wage has the highest price for its non-traded goods and services. Different minimum wage rates provide an explanation for the difference in the price of these services. Second, it is established that the formation of customs union may result in “immiserisation” in all three countries. Third, it is established that the real exchange rate may appreciate in all the three countries as a result of integration. This is a highly undesirable result for all the three countries. Finally, the paper clearly shows that the non-participating country may suffer serious disruptions from the formation of the customs union.

Citation (ISO format)
FLÜCKIGER, Yves, HAZARI, Bharat R. Unemployment, real exchange rate and welfare in a model with specific factors and non-traded goods. In: International Review of Economics & Finance, 1997, vol. 6, n° 2, p. 203–218. doi: 10.1016/S1059-0560(97)90025-3
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Article (Published version)
ISSN of the journal1059-0560

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