Keynesian and Classical Unemployment in an Open Economy

This paper examines various unemployment equilibria in a fix-price model of an open economy with nontraded goods. The economy exports an internationally traded good and imports an intermediate input good. The comparative static effects of various exogenous variables on total employment and the balance of trade are derived and compared across regimes. Considerable emphasis is placed on the employment effects of external disturbances. Both price shocks, such as a rise in the price of the imported intermediate good, and quantity shocks, e.g. a slump in the demand for exportables, are examined, and the appropriate policy for restoring full employment is discussed in each case.