Adjustability in production and dynamic effects of domestic competition policy

Abstract

This study explores the effect on trade balance of suppressing competition in the domestic non-tradable sector through the interaction between the short-run adjustment and the long-run adjustment in production process. Constructing a model that can capture a more short-run aspect than Yano (2001), this study demonstrates that the effect depends on the factor intensity ranking between the tradable sector and the non-tradable sector. In this model, a change in the price of the tradable good at time 0 plays an important role to explain this result.

Key words:

• Adjustability in production
• competition policy
• trade balance
• short run
• long run

Acknowledgements

The author would like to thank Professor Makoto Yano for his encouragement and helpful guidance. The author would also like to acknowledge the comments from Professors Fumio Dei and Shinsuke Ikeda. This paper was presented at the annual meeting of the Japanese Economic Association at Hiroshima University on 13 – 14 October 2002.

Notes

¹ A number of studies emphasize the role of consumption to explain the determination of trade balance. For example, see Obstfeld (1982) and Matsuyama (1987).

² Yano (2004) constructs a generalized version of quasi-stationary dynamic equilibrium models and derives a set of conditions under which a uniform suppression of present and future consumptions results in the short-run trade surplus creation effect.

³ This setting means that the middle product is specific to countries at time 0. The specific-factors model is interpreted as a short-run version of Heckscher – Ohlin model. See, for example, Jones (1971), Mayer (1974) and Mussa (1974).

⁴ Jones (1971) constructs a three-factor, two-commodity model, in which each industry uses only two factors and one of them is specific to the industry. That model is essentially the same as the models of Mayer (1974) and Mussa (1974).

⁵ The hat operator denotes the relative change of a variables, [xcirc] = dx/x.

⁶ These relationships are led as follows. Let θ _LM  = a _LM w/q, θ _YM  = a _YM /ρ, θ _LC  = a_LCw/[(1 − μ)p], θ _YC  = a _YC q/[(1 − μ)p], where p = p ₁ is the good-C price at t = 1 in the initial equilibrium. Recall that q _t  = ρ ^t−1 in the initial equilibrium. Since cost minimization implies q _t−1 da _Yit  + w _t da _Lit  = 0, i = M,C, the following relationships follow from equations (2) and (3);

Since [qcirc] ₀≠ 0 and [qcirc] _t  = 0 for t = 1, 2, 3, …, equation (9) holds.

⁷ The notation of these equations are as follows; λ _LM  = a_LM y _t /([lbar] − l _t ), λ _LC  = a_LC c _t /([lbar] minus; l _t ), λ _YM  = a _LM y _t /x _t−1, λ _YC  = a _LC c _t /x _t−1, δ _L  = λ _LM θ _YM σ _M  + λ _LC θ _YC σ _C and δ _Y  = λ _YM θ _LM σ _M +λ _YC θ _LC σ _C . The notation σ _i for i = M,C represents the elasticity of substitution for sector i.

⁸ By dy ₁, equation (11) at t = 1 and the second equation of condition (10) at t = 1, [xcirc] ₀ is written as a relation of d and [qcirc] ₀. The coefficient of [qcirc] ₀ is highly complicated, and it seems difficult to tell whether the sign is positive or negative. When the law of demand for good M holds, however, the coefficient of [qcirc] ₀ is negative. Under this assumption, the condition [xcirc] ₀ = 0 gives the negative relation between dμ and [qcirc] ₀ is obtained. This assumption is quite natural, and it does not change the main assertion of this paper such that a change in the price of the tradable good at time 0 plays an important role to explain this result.

⁹ When θ _YC θ _LM  − θ _LC θ _YM is positive, non-tradable sector C is middle product intensive. In that a decrease in middle product price lowers the price of the non-tradable good, Stopler – Samuelson theorem holds.