Factor Mobility and Spill-Over Effects in a Model of Multilateral Trade
This chapter sets up a model of multilateral trade that involves both factor and commodity flows across countries’. This model is built on the basis of a customs union framework, which involves three countries and departs from the usual HO model which deals with the case of two-countries, two-commodities and two-factors. Our model has been inspired by the following scenario. Consider, for example, the three countries: the USA (home), Europe (foreign and developed) and India (third world). The USA and Europe produce three commodities, X, Y and Z while India produces only two goods X and Y reflecting the fact that India is less diversified than the other two economies. In view of globalization we shall assume that capital and skilled labour (of the USA and European origin) are fully mobile between these countries, but unskilled labour is immobile. Capital and labour do not generally flow freely from the USA and Europe to India although capital flows are now changing due to India’s economic reforms. However, for analytical convenience they will be ignored. The USA also receives skilled migrants on the basis of a quota from India (a typical immigration pattern between India and the USA). However, due to language, legal and cultural barriers such labour, in general, does not migrate to Europe.
KeywordsSkilled Labour Unskilled Labour Migration Policy Factor Endowment Factor Mobility
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- 1.The model presented in this chapter is based on the earlier works of Jones and Kierkowski (1986) Fluckiger (1984)(1987) and Jilani (1993). In the Fluckiger model there is asymmetric trading. Three countries A, B and C trade two goods, but two countries do not exchange any commodities.Google Scholar
- 2.By introducing three goods in the system it is possible to remove asymmetry from the customs union model.Google Scholar
- 3.Some of these issues will be analysed in later chapters.Google Scholar
- 4.Following Neary (1985) we shall also assume that the production functions in the capital inputs are strictly concave. This assumption is required to ensure that the countries do not become completely specialised.Google Scholar
- 5.Despite capital and skilled labour specificity complete factor price equalisation would occur on account of factor mobility provided the necessary conditions for such equalisation are satisfied.Google Scholar
- 6.Similar diagrams have also been used by: Lin Po-Sheng (1986), Jilani (1993) and Jones and Kierkowski (1986).Google Scholar