The authors show that an increase in international borrowing increases specialization and unemployment in a small open economy that is subject to terms-of-trade risks. The economy has a production advantage in the export sector. However, the size of the export sector is limited by the available...

The paper examines how the Balassa-Samuelson hypothesis is affected by a modern variation of the standard model that allows product differentiation (within the traded and nontraded goods sectors) with the number of firms determined exogenously or endogenously. The hypothesis is found to be...