Dynamic Factors in growth

Growth and Trade

Sources of growth

Growth stems from two main sources:

1. technological change
2. increases in the endowment of
factors
Production effect of growth:
• growth can occur in the export sector or factor
intensively used to produce exports can increase
trade
• growth can occur in the import sector or factor
intensively used to produce import-competing
goods can reduce trade
• growth can be neutral, and affect both sectors
equally.
Commodity-specific technological change and production
effect of growth:
• if technological change is specific to the export sector,
then only productive capacity of the export good
increases.
– (the ppf stretches only in direction of export good)
• if technological change is specific to the import sector,
then only productive capacity of the import good
increases.
– (the ppf stretches only in direction of import good)

• growth can be commodity neutral, and affect both

sectors equally.
technological change can be neutral,
or commodity specific
Obviously,
• growth that causes an increase in the
production of the export good (relative to the
import good) will be a pro-trade production
effect.

• growth that causes an increase in the

production of the import-competing good
(relative to the export good) will be an anti-
trade production effect.
• technological change can also affect the
productivity of factors.
• it can be neutral, or factor-specific
• A factor-specific technological change has the
identical effect on production as an increase
in the amount of the factor available.

• So, let’s look at the effect of an increase in a

factor.
production of both goods, but has a
greater effect on the good that uses
the factor intensively
• labour-saving technological change has the
SAME effect on the PPF as an increase in
labour supply

• Capital-saving technological change has the

same effect on the PPF as an increase in the
supply of capital
• When both L and K Grow at the same rate and
we have constant returns to scale in the
production of both commodities , the
productivity and there fore the returns to L
and K remains the same after the growth as
they were before growth took place .
• If only L grows ( L grows proportionately more
than K) ,K/L will fall and so will the
productivity of L ,the returns to L and the real
per capita income . If on the other hand only
the endowment grows ( K grows
proportionately more than the L ) ,K/L will rise
and so will the productivity of L , the returns
to L , and the real per capita income .
 The Rybczynski Theorem
The Relationship between Endowments and
Outputs.
• The Rybczynski theorem demonstrates how
changes in an endowment affects the outputs
of the goods when full employment is
maintained. The theorem is useful in analyzing
the effects of capital investment, immigration
and emigration within the context of a H-O
model.
• An increase in the endowment of labor
increases the production of labor intensive
good and decreases the production of the
other good (capital intensive good). The cone
of diversification can be used to illustrate
Rybczynski Theorem in the output spac e. An
increase in the endowment of one factor
results in either an ultra-export or import
biased growth.
 The Magnification Effect
   An increase in labor endowment
increases the output of labor-
intensive good more than
proportionately.
 IMMESERIZING GROWTH
• This hypothesis was propounded by the
famous economist Prof Jagdish Bhagwati .
 IMMISERIZING GROWTH

Immiserizing Growth  If the terms

of trade deteriorate sufficiently,
growth can be immiserizing,
lowering income and welfare.