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Pdwfkhv ehwzhhq vhdufklqj zrunhuv dqg �upv rffxu udqgrpo|/ dw wkhSrlvvrq udwh p+xO> yO,/ zkhuh x dqg y vwdqg/ uhvshfwlyho|/ iru wkh iudfwlrqri xqhpsor|hg zrunhuv dqg wkh qxpehu ri vhdufklqj �upv dv d shufhqwdjhri wkh oderxu irufh1 Wkh ixqfwlrq p+=> =, lv fdoohg wkh pdwfklqj ixqfwlrq1 Lwvxppdul}hv wkh khwhurjhqhlw| +jhrjudsklfdo/ whfkqrorjlfdo/ lqirupdwlrqdo111,zklfk lv suhvhqw dfurvv doo srvvleoh �up0zrunhu sdluv1 Dv xvxdo/ p+=> =, lv dv0vxphg wr eh d frqwlqxrxv/ gl�huhqwldeoh/ krprjhqrxv ri ghjuhh rqh ixqfwlrq1E| krprjhqhlw|/ zh fdq zulwh

p+xO> yO, @ yOt+�,> +5,

zkhuh � � y@x lv d sdudphwhu ghqrwlqj wkh �wljkwqhvv� ri wkh oderxu pdunhw1Wkxv/ wkh dyhudjh udwh ri pdwfklqj shu xqlw ri wlph iru d zrunhu dqg d �upduh/ uhvshfwlyho|/ �t+�, dqg t+�,1 Revhuyh wkdw t�+�, ? 3/ wkdw wkh phdqgxudwlrq ri xqhpsor|phqw lv 4@�t+�, dqg wkdw wkh hodvwlflw| ri t+�,/ �/ lvd qxpehu ehwzhhq 3 dqg 041 Dv wkh oderxu pdunhw ehfrphv wljkwhu/ lw lvhdvlhu iru dq xqhpsor|hg wr �qg d mre/ zkloh �upv pxvw zdlw rq dyhudjhorqjhu wr �oo wkhlu ydfdqflhv1 Lw lv hdv| wr vhh krz vhdufk lq wkh oderxupdunhw surgxfhv dq h{whuqdolw|= djhqwv duh qrw frqfhuqhg derxw wkh h�hfwvri wkhlu ghflvlrqv rq rwkhuv* suredelolw| ri pdwfklqj1 Lq wkh vxevhtxhqwdqdo|vlv/ zkhq qhfhvvdu|/ zh zloo uhvruw iru looxvwudwlyh sxusrvhv wr d frqvwdqwhodvwlflw| pdwfklqj ixqfwlrq/ t+�, @ �3#/ 3 ? � ? 41

Iru wkh prphqw/ zh dvvxph wkdw hdfk �oohg mre lv ghvwur|hg udqgrpo|dw wkh h{rjhqrxv Srlvvrq udwh v/ vr wkdw wkh dyhudjh olihwlph ri d mre lv 4@v1

8 Lq rxu dqdo|vlv zh iroorz txlwh forvho| wkh pdwfklqj prgho ri wkh oderxu pdunhwsursrvhg e| Slvvdulghv +4<<3,1

9Wkh dvvxpswlrq wkdw �upv* vl}h lv jlyhq fdq eh mxvwl�hg/ iru lqvwdqfh/ rq wkh jurxqgri prqlwrulqj dqg frruglqdwlrq frvwv +vhh/ h1j1/ Kropvwurp dqg Wluroh +4<;<,,1

:Wkh dvvxpswlrq wkdw zrunhuv fdq pdqxidfwxuh dw prvw rqh lqsxw ydulhw| fdq eh uh0od{hg zlwkrxw frpsurplvlqj uhvxowv1 Lw fdq eh vkrzq/ iru lqvwdqfh/ wkdw dvvxplqj lqsxw0vshfl�f vhdufk frvwv lv vx!flhqw wr jxdudqwhh dq htxloleulxp zkhuh hdfk �up lv qrw zloolqjwr vxsso| pruh wkdq rqh w|sh ri lqsxw1 D surri lv dydlodeoh iurp wkh dxwkruv xsrq uhtxhvw1

9

Lq d odwhu vhfwlrq zh ghulyh hqgrjhqrxvo| wkh suredelolw| ri mre ghvwuxfwlrquhvxowlqj iurp vwrfkdvwlf vkrfnv d�hfwlqj �upv* �{hg frvwv1

6 Htxloleulxp xqghu dxwdufk|

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Iurp frvwv plqlpl}dwlrq lq wkh �qdo vhfwru/ ghpdqg iru hdfk srvvleohlqwhuphgldwh lqsxw l lv ghulyhg dv

G+l, @ \

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fs+m,

443�gm

�43�4

s+l,�

43� = +6,

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614 Wkh �qdo vhfwru

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4 @

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fs+m,

443�gm

� 43�4

= +7,

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s @ q�344 = +8,

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:

615 Wkh oderxu pdunhw dqg wkh lqwhuphgldwh vhfwru

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uY @ �� . t+�,+M � Y ,> +9,

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uM @ s� f�z. v+Y � M,= +:,

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uX @ �t+�,+H � X,> +;,

uH @ z. v+X �H,= +<,

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H � X @ � +M � Y .H � X, = +43,

Xvlqj uhodwlrqv +9,0+43,/ dqg wdnlqj lqwr dffrxqw wkdw Y @ 3 lq wkh vwhdg|vwdwh/ lw lv srvvleoh wr h{suhvv wkh htxloleulxp zdjh udwh dv d olqhdu ixqfwlrqri lqsxw sulfhv dqg pdunhw wljkwqhvv=

z @ �+s� f. ��,= +44,

Diwhu vxevwlwxwlrq ri z iurp +44, lqwr +:,/ zh rewdlq d uhodwlrq ehwzhhq sdqg � wkdw vdwlv�hv iuhh hqwu| lq ydfdqflhv

s @ f.�+u. v,

t+�,+4� �,.

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; Lq wkh vwhdg|0vwdwh wkh dvvhw ydoxh ri d vhdufklqj �up uhpdlqv frqvwdqw ryhu wlph/ vrwkdw/ lq +9,/

�

T' f1 Wkh vdph krogv iru wkh rwkhu dvvhw ydoxh htxdwlrqv lq wkh prgho1<Jlyhq wkh shuihfw v|pphwu| ri zrunhuv dqg lqwhuphgldwh vhfwru �upv/ wkh zdjh udwh

lv qrw jlyhq dq lqgh{ uhihuulqj wr hdfk mrev143Iru vlpsolflw| zh gr qrw frqvlghu xqhpsor|phqw doorfdwlrqv1 Vxfk dq h{whqvlrq zrxog

qrw prgli| rxu frqfoxvlrqv1

;

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x @v

v. �t+�,= +46,

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616 Jhqhudo htxloleulxp

Uhfdoolqj wkdw x @ 4�q@O/ wkh prgho lv vxppdulvhg zlwk d v|vwhp ri wkuhhhtxdwlrqv= +8,/ +45, dqg +46, lq wkuhh xqnqrzqv= q> y dqg s1 Wklv v|vwhp lvqrq olqhdu/ exw lwv vroxwlrq fdq eh fkdudfwhulvhg judsklfdoo|1

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Wkh jhqhudo htxloleulxp ri wkh hfrqrp| lv vxppdul}hg e| phdqv ri dirxu txdgudqwv judsk1

^Lqvhuw �jxuh 4 derxw khuh`

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2 ? � ? 4/ olqhdu zkhq � @ �2 dqg frqyh{ li 3 ? � ? �

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s @ f. �

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7 Lqwhuqdwlrqdo wudgh

714 Xqhpsor|phqw

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^Lqvhuw Iljxuh 5 derxw khuh`

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G

GW@

qW

q= +48,

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54

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55

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56

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57

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58

v

u

n

BC

unXX

YY

vp

p

III

III IV

θ

Figure 1General equilibrium

YYA

YY*T

YYT

XX*

n

pXX

nA* nT* nA nT

pT

pA

pA*

Figure 2The opening of trade

JCJD

$cJD(p)

JD(p’)

θ

Figure 3Equilibrium job creation and job destruction at p and p’>p

v

u

BCA

BCT

uAuT

vA

vT

θA

θT

Figure 4Endogenous job destruction: the opening of trade and the labour market