Relative Quantities and Prices in Small and Open Developing Economies

Abstract

This paper employs variants of a simple framework to discuss the determination of sectoral output and relative prices in a stylized small open developing economy which consists of a traditional sector that produces non-tradables and a modern sector that produces internationally traded goods. The baseline model has the flavor of the traditional two-good dependent economy framework with surplus labor. I then introduce a series of modifications in the structure of the framework to (briefly) explore aspects such as distributional conflict, external balance constraints, capital account considerations, natural resource discoveries, and supply-side bottlenecks. The analysis demonstrates that the basic structure of the framework provides flexible tool for investigating important aspects of the development process in a small open economy.

JEL classification: F41 ; F43 ; O11 ; O14