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Customs Union and the Harris-Todaro Model with International Capital Mobility

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  • Michael Michael
  • Stephen Miller

Abstract

Traditional customs union theory concludes that trade creation enhances welfare. Thus, Yu's (1982) conclusion that trade creation may decrease welfare in the presence of general unemployment is an important observation. Parai and Batra (1987) reestablish the traditional results in the Harris-Todaro model, where unemployment is sector-specific. We conclude that trade creation may decrease welfare in the Harris-Todaro model with international capital mobility when labor subsidies or capital taxes (subsidies) exist. Moreover, second-best labor subsidies or capital subsidies (taxes) recommended by some authors increase the chances of welfare decreasing trade creation. Copyright Kluwer Academic Publishers 1992

Suggested Citation

  • Michael Michael & Stephen Miller, 1992. "Customs Union and the Harris-Todaro Model with International Capital Mobility," Open Economies Review, Springer, vol. 3(1), pages 37-49, February.
    • Handle: RePEc:kap:openec:v:3:y:1992:i:1:p:37-49
    DOI: 10.1007/BF01886180
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    References listed on IDEAS

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    1. Bhagwati, Jagdish N & Srinivasan, T N, 1974. "On Reanalyzing the Harris-Todaro Model: Policy Rankings in the Case of Sector-Specific Sticky Wages," American Economic Review, American Economic Association, vol. 64(3), pages 502-508, June.
    2. Srinivasan, T. N. & Bhagwati, Jagdish, 1975. "Alternative policy rankings in a large, open economy with sector-specific, minimum wages," Journal of Economic Theory, Elsevier, vol. 11(3), pages 356-371, December.
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    4. Das, Satya P., 1981. "Effects of foreign investment in the presence of unemployment," Journal of International Economics, Elsevier, vol. 11(2), pages 249-257, May.
    5. repec:bla:econom:v:42:y:1975:i:165:p:59-78 is not listed on IDEAS
    6. repec:bla:econom:v:55:y:1988:i:217:p:119-21 is not listed on IDEAS
    7. Parai, Amar K. & Batra, Raveendra N., 1987. "Customs union and unemployment in LDCs," Journal of Development Economics, Elsevier, vol. 26(2), pages 311-319, August.
    8. Yu, Eden S H, 1982. "Unemployment and the Theory of Customs Unions," Economic Journal, Royal Economic Society, vol. 92(366), pages 399-404, June.
    9. Miyagiwa, Kaz, 1988. "Corporate income tax incidence in the presence of sector-specific unemployment," Journal of Public Economics, Elsevier, vol. 37(1), pages 103-112, October.
    10. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-142, March.
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