Foreign Capital Inflow, Non-traded Intermediary, Urban Unemployment, and Welfare in a Small Open Economy: A Theoretical Analysis

Abstract

The paper attempts to analyse the implications of foreign capital inflow in a small open economy with a non-traded intermediary on the welfare and urban unemployment in a three-sector Harris-Todaro (1970) framework. The standard immiserising result of a foreign capital inflow has been found to be valid when the non-traded intermediary is solely used in the protected import-competing sector. However, if the export sector too uses the intermediary, the economy may experience an improvement in its welfare and a reduction in the urban unemployment level.