Theory and Policy of Adjustment in an Open Economy

Abstract

Almost all discussions of economic policy are concerned with issues of adjustment, and this is especially true in matters relating to international trade. Whether it is the effects of changes in world prices, increased foreign competition or a currency realignment, policy-makers and the general public want to know how the economy will move towards its new equilibrium and not just what that equilibrium will look like. Economists, whose job it is to answer such questions, must dip into their theoretical tool-kit and attempt as best they can to apply the most relevant theoretical framework to the problem at hand. Typically, the most difficult part of this task is not to elucidate the properties of a particular model, but to choose in the first place which model is appropriate to a given problem.