Abstract:
In this paper, we construct a three-sector general equilibrium model of a small open
economy with an informal sector and examine the impact of a less protectionist policy on
output levels, factor prices, and the level of urban employment. We show that the urban
unemployment rate has reduced with the contraction of an import-competing
manufacturing sector consequent upon tariff reductions. The informal intermediate
sector has contracted as well. A possibility to expand the exportable agricultural sector
exists, with an increased wage rate. Our analysis is then extended to introduce foreign
capital inflow and examine the output effects and the level of unemployment.
Interestingly, in the extended model, urban unemployment is aggravated as a result of an
inflow of foreign capital.
