The Economic Reunification of Korea: A Dynamic General Equilibrium Model

Abstract

This paper constructs a dynamic specific factors model to examine the impact of the economic reunification of North and South Korea. The model is a compromise between the highly stylized neoclassical models of trade found in the theoretical trade literature, and the highly aggregated models used in dynamic macroeconomics. We find that the policies with the biggest effects on aggregate output are changes in government tax and spending rates, particularly spending on infrastructure. In contrast, we find that both skilled and unskilled wages are much more responsive to the particulars of trade policy, particularly openness to intra-Korea trade and intra-Korea labor mobility. The location of production in a fully integrated Korean economy is determined by the location of infrastructure.factor mobility; dynamic general equilibrium; specific-factors; Korea