INTERNATIONAL MARKET INTERDEPENDENCE AND LEARNING-BY-DOING IN A RISKY WORLD

This paper explores the role of international financial markets for the dynamic evolution Of comparative advantage in a small economy. In a world where learning-by-doing alters labor's productivity over time, the current allocation of labor across industries determines the future productivity of labor in each industry and future comparative advantage. The presence of technological uncertainty that is imperfectly correlated across two industries affects the current labor allocation and, thus, future industry-specific labor productivity. The introduction of international financial markets to this stochastic environment influences current resource allocations, future labor productivity, and consequently, the future path of comparative advantage. JEL No. F10, F43, G15