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Terms of Trade, Exchange Rates and Labor Markets Adjustment in Developing Countries

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  • Sebastian Edwards

Abstract

This paper uses three models of a small open economy to analyze the effects of terms of trade and exchange rate changes (i.e. devaluations) on labor market adjustment. First, a three goods (exportables, importables, non-tradables), four factors model is developed and used to investigate how an exogenous worsening of the intern.ationa1 terms of trade affect labor allocation and wages. Second, a more traditional three goods, two factors model is used, and its results are compared to those of the first case. The analysis is carried out under alternative assumptions regarding wage flexibility: full flexibility, economy-wide (real) wage rigidity, and sector specific real wage rigidity. Finally, a three final goods model with imported intermediate inputs is used to investigate the effects of devaluations on aggregate and sectoral employment. Here the conditions under which a devaluation will be contractionary (i.e. will result in a reduction of employment) are determined.

Suggested Citation

  • Sebastian Edwards, 1986. "Terms of Trade, Exchange Rates and Labor Markets Adjustment in Developing Countries," NBER Working Papers 2110, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2110
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    1. Van Wijnbergen, Sweder, 1986. "Exchange rate management and stabilization policies in developing countries," Journal of Development Economics, Elsevier, vol. 23(2), pages 227-247, October.
    2. Sebastian Edwards & Liaquat Ahamed, 1986. "Economic Adjustment and Exchange Rates in Developing Countries," NBER Books, National Bureau of Economic Research, Inc, number edwa86-1.
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    Cited by:

    1. Zeng, Xiangquan & Yuxue, Cui & Shisong, Qing & Yumei, Yang, 2011. "Real Exchange Rate, Foreign Trade and Employment: Evidence from China," IZA Discussion Papers 5931, Institute of Labor Economics (IZA).
    2. Hong-Yu Lin, 2014. "Transaction Costs, Multiple Equilibria, and Currency Devaluation," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(12), pages 1705-1718, December.
    3. Xinpeng Xu & Yu Sheng, 2014. "Terms of Trade Shocks and Endogenous Search Unemployment: A Two-Sector Model with Non-Traded Goods," Pacific Economic Review, Wiley Blackwell, vol. 19(2), pages 201-215, May.
    4. Joshua Aizenman, 1986. "Labor Markets and the Choice of Technology in an Open Developing Economy," NBER Working Papers 1998, National Bureau of Economic Research, Inc.
    5. M Bahmani-Oskooee & I Miteza, 2006. "Stock Market Growth: An analysis of cointegration and causality," Economic Issues Journal Articles, Economic Issues, vol. 11(1), pages 37-64, March.
    6. Riveros, Luis A. & Paredes, Ricardo, 1988. "Measuring the impact of minimum wage policies on the economy," Policy Research Working Paper Series 101, The World Bank.

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