Chapter

The Basic Mechanisms

Olivier Blanchard

in The Economics of Post-Communist Transition

Published in print July 1998 | ISBN: 9780198293996
Published online November 2003 | e-ISBN: 9780191595998 | DOI: http://dx.doi.org/10.1093/0198293992.003.0002

Series: Clarendon Lectures in Economics

 The Basic Mechanisms

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Chapter 2 focuses on the basic mechanisms behind the initial decline in output and the later recovery. I argue that there have been two main mechanisms at work. The first is reallocation. Some sectors, such as manufacturing, need to decline; others, such as trade and services, need to expand. I argue that this reallocation process, and its many dimensions, can explain the initial output decline and the initial increase in unemployment. The second mechanism is restructuring. If they are to survive, existing firms need to change their product lines, to close old plants and build new ones and so on. I show how restructuring can explain both the recovery of output and the continuing high rate of unemployment.

Keywords: disorganization; firms; manufacturing; output; reallocation; restructuring; services; trade; unemployment

Chapter.  10376 words.  Illustrated.

Subjects: Economic Systems

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