DP61 Theory and Policy of Adjustment in an Open Economy

Author(s):	J Peter Neary
Publication Date:	April 1985
Keyword(s):	Adjustment, International Trade Theory, Long Run, Short Run, Structural Change
JEL(s):	111, 411
Programme Areas:	International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=61

This paper presents a non-technical introduction to the analysis of how an open economy adjusts to exogenous shocks. Three alternative models of adjustment are considered, each one appropriate to a different time horizon: the specific-factors model with transitional unemployment for the short run; the Heckscher-Ohlin model with temporary capital specificity for the medium run; and a new model of growth and structural change for the long run. Consideration is also given to the choice of policies towards the adjustment process, from both a welfare economic and a political economy perspective.