Variable labour supply, specialisation-based external economies, and capital inflow

Anwar, Sajid (2005) Variable labour supply, specialisation-based external economies, and capital inflow. International Review of Economics & Finance, 14 (4). pp. 427-437.

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This paper examines the impact of exogenous capital inflow on prices, production, labour supply, and welfare in the presence of specialisation-based externalities. The paper utilises a simple model of an economy that produces one-final good by means of capital, labour, and a large number of varieties of an intermediate good. The intermediate good is produced by means of capital and labour. The supply of capital is exogenous but the supply of labour is endogenous. The presence of internal economies of scale in the intermediate good industry gives rise to specialisation-based external economies in the production of the final good. Perfect competition prevails in the final good industry whereas the intermediate good industry operates under Chamberlinian monopolistic competition. It is shown that exogenous capital inflow decreases labour supply and increases welfare only if the elasticity of substitution between leisure and the final good is equal to or less than unity. The paper also shows that, if trade opens up between two otherwise similar economies, a capital rich country would be a net importer of varieties of the intermediate good.

Item ID: 6485
Item Type: Article (Research - C1)
ISSN: 1873-8036
Keywords: capital inflow; monopolistic competition; variable labour supply
Date Deposited: 23 Mar 2010 05:05
FoR Codes: 14 ECONOMICS > 1402 Applied Economics > 140211 Labour Economics @ 100%
SEO Codes: 91 ECONOMIC FRAMEWORK > 9102 Microeconomics > 910204 Industry Costs and Structure @ 100%
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