ABSTRACT
This chapter utilizes the framework of Chapter 4 to examine the implications of a change in the terms of trade on the real exchange rate in the presence of urban unemployment. The less developed countries (LDCs) have been subjected to major exogenous shocks and drastic domestic policy changes in recent years. These shocks have taken the form of changes in the terms of trade and/or a policy shift away from the pervasive protectionism of the previous decades. The implementation of trade liberalization programmes is more likely to follow in several developing countries. A large body of theoretical and empirical literature has developed which attempts to analyse the consequences of these changes, utilizing models which explicitly incorporate the main structural and institutional characteristics of the economies of the LDCs. 1 The behaviour of the real exchange rate, defined in various ways but most commonly as the relative price of tradeables to non-tradeables, has been identified as being of central analytical and policy importance.
