Dynamic Stability, Paradoxical Comparative Statics, and Factor-Market Distortions in an Economy with Three Production Sectors

In an earlier paper the authors clarified the relationship between the stability of long-run equilibrium and the possibility of paradoxical comparative statics in the Lerner-Samuelson two-by-two model of production with factor-market distortions (see Review of International Economics 9 (1901):383-400). The present paper extends the analysis to an economy with three production sectors. It is found that almost all properties of long-run equilibrium in the two-by-two model with factor-market distortions continue to hold, while some new properties, such as plurality of equilibrium, appear. Specifically, the instability of the adjustment process is not ruled out; a paradox cannot coexist with stable equilibrium in a small open economy, but may do so in a closed economy