We extend the Jones (1971) analysis of the effects of distortions in 2×2 trade models to the case of a two-sector dynamic general equilibrium model of a small open economy with capital accumulation. We do a comparative steady state analysis for the effect of policy changes on factor prices and the capital stock, and examine the dynamics of the system in the neighborhood of the steady state. We also show that the system will have multiple equilibria when value and physical factor intensity rankings of the sectors do not agree.
Bond, E.W. and Driskill, R.A. (2008), "Chapter 9 Distortions in the Two-Sector Dynamic General Equilibrium Model", Marjit, S. and Yu, E.S.H. (Ed.) Contemporary and Emerging Issues in Trade Theory and Policy (Frontiers of Economics and Globalization, Vol. 4), Emerald Group Publishing Limited, Bingley, pp. 165-190. https://doi.org/10.1016/S1574-8715(08)04009-8
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