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Does it Matter Whether Market Distortions are Evaluated Using Comparative-statics or Dynamics?

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  • Peter G. Mavromatis
  • George Verikios

Abstract

We analyse the welfare outcomes of market distortions using a general-equilibrium model of a small, open economy that captures the trade-theoretic continuum from specific factors to Heckscher-Ohlin. We show the importance of two intrinsically dynamic phenomena on evaluating market distortions: structural change and imperfect factor mobility. We find that when these phenomena are captured in a dynamic framework, market distortions can generate welfare effects that contradict those generated by a comparative-static framework. We also find that the degree of factor mobility is important for accurately estimating the size of welfare effects. Our results suggest that market distortions should be evaluated in a dynamic framework that represents structural change and imperfect factor mobility, and that the degree of factor mobility should be treated as a parameter whose value is uncertain and subjected to sensitivity analysis.

Suggested Citation

  • Peter G. Mavromatis & George Verikios, 2008. "Does it Matter Whether Market Distortions are Evaluated Using Comparative-statics or Dynamics?," Centre of Policy Studies/IMPACT Centre Working Papers g-178, Victoria University, Centre of Policy Studies/IMPACT Centre.
    • Handle: RePEc:cop:wpaper:g-178
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    Cited by:

    1. Bandopadhyay, Titas Kumar & Chaudhuri, Sarbajit, 2011. "Job-search and FDI in a two-sector general equilibrium model," MPRA Paper 35564, University Library of Munich, Germany.
    2. Bandopadhyay, Titas Kumar & Chaudhuri, Sarbajit, 2011. "Job-search and foreign capital inflow — A two sector general equilibrium analysis," Economic Modelling, Elsevier, vol. 28(6), pages 2494-2501.

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    More about this item

    Keywords

    market distortions; welfare; comparative-statics versus dynamics; general equilibrium;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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