Urban Unemployment and the Gains from Trade

Abstract

A welfare ranking of alternative commercial policies is constructed for the mobile capital Harris-Todaro economy. It is sh own that, despite the presence of unemployment, most noninterventioni st policies suggested by the competitive model of gains from trade ca rry over to the mobile capital Harris-Todaro economy. Yet in contradi ction to the competitive model, it is shown that all forms of trade i ntervention are not detrimental to welfare. Only those that reduce th e volume of trade are. The export promotion policies so copiously fol lowed by developing countries are vindicated, but their import substi tution policies are shown to be without justification. Copyright 1987 by The Review of Economic Studies Limited.