Devaluation, Export Quality and Employment in a Small Dependent Economy

Abstract

This paper investigates how devaluation by a small open economy affects its export quality when higher quality requires more of skilled labour and capital; and the ramifications of such quality changes on employment of unskilled labour and real income. In a competitive general equilibrium structure with cost of export quality determined endogenously, changes in export quality is shown to be contingent upon whether higher quality is more skill intensive or more capital intensive; but, aggregate employment of unskilled labour rises unambiguously under homothetic taste, and under reasonable conditions under non-homothetic tastes. These results qualify several robustness checks