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An Analysis of Brisk Exports and Sluggish Domestic Demand Using a Nontradables Model(Vol.8 No.2)

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An Analysis of Brisk Exports and Sluggish Domestic Demand Using a Nontradables Model: The Case of Korea(Vol.8 No.2)

This study employs a nontradables model to analyze the current economic situation characterized by brisk exports yet sluggish domestic demand in Korea. The present conjuncture is not easily explained by traditional views that increased exports will generate increased domestic demand. The depreciation of the won after the currency crisis along with economic liberalization raised the relative prices of tradables and contributed to an increase in their production. On the other hand, this condition has reduced demand for nontradables and the production of them. The nontradables model explains that the divergent performance of tradables and nontradables can be resolved by a combination of short-term and long-term policies. Appreciation of the won based on the market mechanism supplemented by an aggregate demand expansion policy can be used in the short-term. In the long run, a gradual structural adjustment in the nontradables sector and a steady flow of funds into it, and especially the services sector, are suggested in order to prevent the tradables sector from impeding the growth of the nontradables sector.

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