This paper considers how the structure of an open economy determines its flexibility in responding to external shocks. Inter- and intrasectoral reallocation of both expenditures and factors of production are shown to mitigate the consequences of a severe terms-of-trade shock. We demonstrate that...

This paper analyzes income and consumption risk resulting from fluctuations in the terms-of-trade in a small open economy when factors can be reallocated after incurring a fixed cost. This fixed cost of relocation across sectors introduces partial labor mobility and sector-specific uncertainty....