Chapter 11: Economic Growth and International Trade

Classifying The Trade Effects 0f Growth Trade Effects of Consumption Growth

Trade Effects of Production Growth

 Neutral consumption effect – consumers

have not changed their relative consumption
pattern with growth
 Antitrade consumption effect
 Ultra-antitrade consumption effect
 Neutral production effect – output of both  Protrade consumption effect
exportable and importable goods increases in
the same proportion
 Protrade production effect
 Ultra-protrade production effect
 Antitrade production effect
 Ultra-intratrade production effect  Ultra-protrade consumption effect
Sources of Growth & the PPF Factor Growth, Trade & Welfare
The Effects of Technological Change (Small Country Case)
 Rybczynski Theory – Growth in one factor
leads to an absolute expansion in the product
that uses that factor intensively and an absolute
contraction in output of the product that uses
the other factor intensively
 In a small country, this happens when it
starts to specialize in one product at the
expense of producing other products
 This increases the opportunity costs of
 Factor neutral exports and makes it more dependent on
 Labour saving imports (of other products). Result is lack of
 Capital saving diversification
 Commodity-neutral technological change
 Endogenous growth models

(Large Country Case)

The Effects of Factor Growth

 Factor neutral growth – If both factors grow at

the same rate, the PPF shifts out in an equal
proportional manner
 Growth in capital only – If only capital grows,
production of both goods can potentially
increase, but the increase is relatively larger in
the capital-intensive good
 Growth in Labour Only – If only labour grows,
the impact on production is relatively greater in
the labour-intensive good
Large-Country Growth and Terms of Trade The Case of Immiserising Growth
Effects

 Economic growth in country I leads to an ultra-

protrade production effect and a neutral
consumption effect, resulting in an increase in
its desired amount of trade. This causes country  When a large country experiences economic
I's offer curve to shift outward and international growth, the change in its terms of trade (TOT)
relative prices to lower from TOT0 to TOT1 can be so unfavourable that it ends up worse off
Growth, Tot Effects and Welfare compared to its conditions before the growth
 This is called Immiserising growth, and it
happens when the country's export prices
decrease relative to its import prices, resulting
in lower welfare levels for consumers and
producers, as shown by a lower indifference
curve.
Growth in the Scarce Factor in the Large-
Country Case

 The decline in country I's terms of trade (TOT)

after growth results in reduced production of
export good B and increased production of
import good A, causing a shift in consumption
from C1 to C2
 This leads to a decrease in specialization and  Growth is a scarce factor for a large economy
trade, resulting in a fall in well-being leads increase in production of an impact price
(represented by the shift from IC1 to IC2) of imports weaken TOT strengths and
compared to a scenario where TOT had not production of exports increases
changed
 However, despite this decrease in well-being,
country I is still better off with the price changes
and growth compared to the pre-growth
situation (IC0).
Growth and the Terms of Trade:
A Developing-Country Perspective
 In countries where population (and labour) is
growing rapidly, stimulus in production (in
addition to labour) must occur for per capita
incomes to improve steadily
 Challenges for developing countries I.T.O
Influencing world trade & prices:
1. Econ. Growth based on increased
production could lead to weakening of tot
2. Growth may lead to changes in relative
demand for final products (and income
changes)
3. Countries that rely on exports of primary
goods for export earnings may find that
international prices do not rise as rapidly
as the prices of other (types of) goods
they import due to differences in price
elasticities