The purpose of this study is to suggest diverse models of Korean economy that is based on the theory of general equilibrium and come up with further recommendations by evaluating policy results based on the theory.
An analysis of the economic effectiveness of tariff rate adjustments initiated in January 1989, demonstrates that it did not have significant impact. It showed 0.26% increase in nominal GDP, 0.49% decrease in price, and 0.24% increase in employment. Also, it resulted in a decrease in trade balance that amounted to 480 million dollars by increasing export up to 540 million dollars and import up to a billion dollars. In terms of industry, rather than import which focused on nonferrous metal products and chemicals, export industries’ productivity had increased. Moreover, between 1989 and 1993, long-term reduction on tariff rate contributed to the economy similar to tariff adjustment in 1989.
In research related to the revaluation of the Korean won, analysis shows that appreciation rate was 10%, which allowed real GDP to decrease by 0.6%, export by 8% and increase import up to 3%. Followed by reevaluation, decrease in productivity shows differences amongst industries; if the elasticity of supply curve on export is bigger, it means that the portion of export is larger in total productivity, and eventually will be more effective. Also, if the wage is adjusted to be flexible and labor turnover between industries are allowed, reevaluation will only affect labor structure of industries, not the employment as a whole. But if there is no elasticity in nominal wages and labor turnover is not easy, reevaluation will have direct impact in employment.
Currency changes between Japanese Yen and US Dollars and its impact on Korea’s economy can be experimented when the substitution effect occurs between Korean and Japanese exports. If there is no substitution effect, while Yen increases by one percent, Korea’s nominal GDP increases by 0.1% and brings 0.012% of actual economic growth. Also, while employment rate increases by 0.027%, total export increases to 7 million dollars, trade balance improves by 150 million dollars due to decrease in total import. If there is a substitution effect and it becomes bigger, real GDP will increase. For instance, if the substitution effect is 0.5, real GDP will increase by 0.026% and if the effect is set as 1.0, GDP will increase to 0.036%. So, if the substitution effect is 1.0, appreciation of Yen by 1% has similar economic expansion effect as appreciation of Won by 1%.
The impact of price increases has different effects depending on the industry. Transportation, communication, nonmetallic mineral products, and chemical products showed effects from increasing price; transportation, chemical products, and rubber goods showed effects from decreased productivity; and petroleum product, construction, transportation and chemical industry showed effects from decreased employment. By looking into total variable perspective, an increase in petroleum decreases real GNP and increases consumer prices, and further aggravates the trade balance. It is recommended that a total solution, which reacts to the stagflation phenomenon in the future and smoothly distributes resources between industries is needed.