Growth, National Welfare and Trade Balance in a Small Open Economy: A General Equilibrium Analysis

This article considers a competitive three sector general equilibrium model of a small open less developed economy which exports product produced by child labour_ Child labour using export and service sector attempt to incorporate the informal sector into the model. Import competing sector is, the formal sector where capital acts as specific factor of production. Labour market distortion is capiured by wage differential between formal and informal sectors. Goods produced by export and import competing sector may be traded but the service sector produces non-traded final good. In this set up, the paper shows that the impact of economic expansion on trade balance, as well as, on national welfare will be different as the source of economic expansion is altered. If growth is captured by an, increase in don:estic capital stock then growth may well be immiserising in natyre and trade balance will deteriorate. On the contrary, when increase in adult labour endowment brings economic expansion, in our model then there will be improvement in welfare level of the economy and trade balance will be unchanged.