Capital mobility, tariffs, unemployment and the real exchange rate

This paper examines the consequences of international capital mobility for income, unemployment and the real exchange rate in a multisectoral general equilibrium model. An important result obtained in the standard trade model is the possibility of immiserization of the host country as a consequence of foreign capital inflow. This issue is re-examined in the context of a more general model and it is established that such ‘immiserization’ depends critically on rural, urban factor intensity rankings and the income elasticities of the non-traded goods. This more general result differs from the standard theorems where ‘immiserization’ depends on the capital intensity of the imported good. This paper also highlights the importance of disaggregating the economy into regions and goods. Under certain plausible conditions it is also established that such foreign capital inflows mayraise the level of urban unemployment and that in out model Dutch Disease type movements in the real exchange rate may occur in the presence of dual labour markets.