This paper uses a 42-country model of production and trade to assess the implications of eliminating current account imbalances for relative wages, relative GDPs, real wages, and real absorption. How much relative GDPs need to change depends on flexibility of two forms: factor mobility and adjustment in sourcing of imports, with more flexibility requiring less change. At the extreme, U.S. GDP falls by 30 percent relative to the world's. Because of the pervasiveness of nontraded goods, however, most domestic prices move in parallel with relative GDP, so that changes in real GDP are small. IMF Staff Papers (2008) 55, 511–540. doi:10.1057/imfsp.2008.17; published online 24 June 2008

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We incorporate trade imbalances into a quantitative model of bilateral trade in manufactures, dividing the world into forty countries. Fitting the model to 2004 data on GDP and bilateral trade we calculate how relative wages, real wages, and welfare would differ in a counterfactual world with all current accounts balancing. Our results indicate that closing the current accounts requires modest changes in relative wages. The country with the largest deficit (the United States) needs its wage to fall by around 10 percent relative to the country with the largest surplus (Japan). But the prevalence of nontraded goods means that the real wage in Japan barely rises while the U.S. real wage falls by less than 1 percent. The geographic barriers implied by the current pattern of trade are sufficiently asymmetric that large bilateral deficits remain even after current accounts balance. The U.S. manufacturing trade deficit with China falls to $65 billion from its 2004 level of $167 billion.

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Between 1978 and 2003 the Chinese economy experienced a remarkable 5.7 percent annual growth of GDP per labor. At the same time, there has been a noticeable transformation of the economy: the share of workers in agriculture decreased from over 70 percent to less than 50 percent. We distinguish three sectors: private agriculture and nonagriculture and public nonagriculture. A growth accounting exercise reveals that the main source of growth was TFP in the private nonagricultural sector. The reallocation of labor from agriculture to nonagriculture accounted for 1.9 percent out of the 5.7 percent growth in output per labor. The reallocation of labor from the public to the private sector also accounted for a significant part of growth in the 1996-2003 period. We calibrate a general equilibrium model where the driving forces are public investment and employment, as well as sectorial TFP derived from our growth accounting exercise. The model tracks the historical employment share of agriculture and the labor productivities of all three sectors quite well. are deeply appreciated. a quantitative, general equilibrium growth model to try to capture China's recent growth and structural transformation. We use this model to project the likely path of China's future growth, and the role the transfer of labor from agriculture to nonagriculture will play in this growth.Our model has three sectors, the agricultural sector, the nonagricultural private sector, and the nonagricultural public (government) sector. The agricultural and the nonagricultural private sectors are profit maximizing; but we leave the objective of the Chinese public sector unspecified; the public sector simply extracts labor and capital from the rest of the economy. China is nominally still a socialist economy. At the beginning of our period, 1978, the public sector produced nearly all of nonagricultural output. Even in 1990, public sector output was over 90 percent of nonagricultural output. Thus, for China, it is important to model the public sector explicitly.Technological progress is exogenous in all three sectors, but is highest in the nonagricultural private sector. We show in the analysis of our model that the expansion of the nonagricultural public sector-which occurred in China from the late-1970s to the mid-1990s-will draw labor out of agriculture. We also show that the more rapid technological progress in the private nonagriculture sector will draw labor out of agriculture. A rise in private nonagricultural productivity will tend to lower the relative price of nonagricultural goods, raising the demand for labor in private nonagriculture, at the expense of labor in agriculture. Using plausible parameter values, we simulate our model and find that the model tracks the historical employment share of agriculture, and the labor productivities of all three sector remarkably well. Thus, the two main driving forces for China's structural transformation-or the decline in the agricultural share of employment-are the expansion of the nonagricultural public sec...

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