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Long‐run Lunacy, Short‐run Sanity: a Simple Model of Trade with Labor Market Turnover *
Author(s) -
Davidson Carl,
Matusz Steven J.
Publication year - 2006
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2006.00574.x
Subject(s) - sanity , economics , short run , frontier , simple (philosophy) , monetary economics , law , philosophy , epistemology , political science
It is often argued that international trade is all about long‐run relationships. In this paper, we argue that this view is flawed when factor markets are characterized by turnover. Toward that end, we provide a simple dynamic model of trade with labor market turnover and show that the relationship between the economy's short‐run and long‐run behavior is more complex than in traditional trade models. For example, in the short run, the economy may produce outside of its long‐run frontier. We show that focusing on long‐run relationships can lead one to draw faulty policy conclusions, while focusing on its short‐run behavior restores sanity. The implication is that in the presence of factor market turnover, international trade issues can only be understood by studying the entire dynamic path of the economy. Long‐run relationships should be ignored.