So the country (like so many others in the East and South of Europe) must now make a major shift from non-tradeables
to tradeables, and this in the context of a currency peg (and a significant level of external indebtedness) is not going to be an easy task.
For example, if productivity in the tradeables sector of the economy grows faster than productivity in the non-tradeables sector, it will push-up wages in the economy, including the non-tradeables sector (David Faulkner and Konstantin Makrelor, 2008).
This in turn increases domestic demand in the tradeables and the non-tradeables sectors of the economy.
He rejects any all-inclusive explanation, including the oft-mentioned phenomenon of "Dutch Disease," in which resource rents effectively displace other export sectors and transfer domestic production to less sustainable non-tradeables
, as well as a host of other single causal factors in the economic, political or social structures of the OPEC states.
However, if capital inflow is used for the production of nontradeables then the conversion of foreign exchange in domestic currency Will increase the money supply and as a result the prices of non-tradeables will go up causing an appreciation of the real exchange rate.
Excess domestic credit creation ('EXDC'), given the price of tradeables, leads to a rise in the price of non-tradeables, thus causing a real exchange rate appreciation.
While the prices of tradeable commodities use to the given by the world market, those of non-tradeables are determined by domestic supply and demand.
those of non-tradeables are endogenously determined by domestic supply and demand.
The shadow price for non-tradeables
proposed by Little and Mirrlees is the marginal cost of an extra unit, valuing the inputs at shadow prices.
0: the relationship between prices of tradeables and non-tradeables
in the process of development; and the share of tradeables and non-tradeables
in the budget as incomes grow.
Devaluation, or more precisely a depreciation of the real exchange rate, raises the relative price of tradeables to non-tradeables
, and thus works towards obtaining the desired shift.
Wage-earners or production workers have been categorized as a special form of non-tradeables