This paper explores the impact of unification on North and South Korea under the hypothetical scenario that German-type reunification occurs in the Korean peninsula. Simulation results using a global dynamic general equilibrium model show that with
comprehensive market-oriented reform and opening, the North Korean economy could capitalize on its growth potentials. Unification can reduce growth rate in South Korea for a certain period following the unification shock due to the transfers of resources out of the South into the North and an increase in risk on the Korea peninsula. Due to the relative sizes in population and per capita GDP of the two Koreas, unification can bring about more disruptive effects on North and South Korea, compared to the experience of Germany. The critical factors determining the economic effects of unification are the nature of wage-adjustment, the size of resource transfers from the South to North, and exchange rate policy.