We discuss at length the effects of different reforms on the distribution of income across factors of production and across the sectors of the economy. Both theoretical work (Fernandez and Rodrick (1991), Hillman (1989)) and empirical studies (Little et al. (1970), Krueger (1978), and Papageorgiou et al. (1990)) have pointed clearly to the impact on the distribution of income as a key consideration in the design and implementation of reforms.
Section 2 lays out the basic model that forms the backdrop for our investigation. Section 3 studies the effects of different deterministic reforms in an economy with free access to international capital markets. Section 4 studies the implications of similar reforms in an economy without access to international capital markets. A final section summarizes the main results. easyloans-now.com
The economy is populated by a large number of agents with identical preferences. These agents own domestic firms and supply inelastically one unit of labor in
every period. They can borrow and lend in the international capital market at a real interest rate r*. For this reason consumption and savings decisions can be separated from production and investment decisions. The latter seek to maximize the economy’s wealth. Given the level of wealth thus obtained households choose optimally their consumption bundle and their savings rate. Since we are interested in analyzing production and investment decisions we can do so by focusing on the wealth maximization problem and abstract from the household’s consumption and savings decisions.
Domestic firms take prices as given in the world goods market and produce either good a or b. Domestic prices do not coincide with prices in the world market due to the presence of import tariffs. Our economy has a comparative advantage in the production of good a, so it will tend to export good a and import good b.
Firms choose to enter or exit in response to changes in their industry’s profitability. We normalize the time that it takes to enter or exit the industry to one period. It is thus appropriate to interpret each time period in the model as being longer than one year.