Foreign trade and economic

development
“Foreign trade is an engine of economic growth”
1. Historical review of trade and development
2. Economic and non-economic arguments in favor of trade
3. Trade and large countries
4. Trade and small countries – immeserizing growth, J curve
hypothesis, center periphery argument
5. Static and dynamic gains from trade
6. Trade policies – inward looking and outward looking
7. Free vs. restrictive trade policies
8. Foreign trade and international financial institutions – IMF,
WB, ADB, WTO, etc.
Continued……………
9. Foreign trade and foreign exchange rate, BOP,
etc.
10. Foreign trade and international money and
capital market
11. International trade and factors of production
12. Foreign trade and globalization
13. Traditional and modern theories of foreign
trade
 • Foreign trade- consumer’s surplus, variety, abolition
Full of domestic monopoly, global competence, division
utilizat of labor and specialization, standardization,
ion of
produ technological exchange, technical progress,
ctive industrialization.
capaci
ty
• Foreign trade – free flow of factors of production,
Empl
oym factor mobility, standardization of wages, better
ent wage conditions, better opportunities, trade and
gene demographic factors, Diaspora identity
ratio
n
• Foreign trade – encouragement to export potential,
Reve
nue foreign exchange reserves, improvement in BOP,
gene FDI, FII, appreciation of domestic currency.
ratio
n
 Foreign trade

Proper allocation of resources, employment

generation, increase in production, comparative
cost advantage, etc.

Increased income level, Revenue generation,

better living standards, foreign exchange reserves,
strengthens capital base trade relations harmony

Economic development
 Opportunities to invest, cheap
labor source, favorable terms of
trade

Developed countries
BOP surplus, appreciation of
currency, monopoly power in
international market, dominance
over the policy making in
developing countries and IMF,
WB, etc. ex. Doha discussion
round of WTO. TRIPs, TRIMs, etc.

Foreign trade

Technical know-how, utilization of

excess capacity, variety in
consumption, trade protection,
export potential

Developing and underdeveloped

countries

Unfavorable terms of trade,

dependence on developed
countries for export demand, BOP
deficit, depreciation of currency,
immeserizing growth, dominance
of developed countries
* Inward and outward looking development policies:

“Outward-looking development policies encourage not

only free trade but also the free movement of capital,
workers, enterprises & students……the multinational
enterprise & an open system of telecommunications”

“By contrast inward-looking policies stress the need for

LDCs to develop their own style of development & to
control their own destiny”

By Dr. Paul Streeten

Inward looking development / trade policy:
Ex. Brazil, Mexico, Argentina, India, etc.

Advantages
Disadvantages

Employment
generation Productive and cost
inefficiency

Improvem
ent in BOP Domestic monopoly power, poor quality production, lack
condition of global competence, obsolete technology

Import substitution and Factor substitution, large scale

unemployment,
export promotion

Revenue for the Ineffective in

government the long run

Inclusive
growth

Self
reliance
• Outward looking development / trade policy:-
Ex. China, India, US, etc.

Advantages
Disadvantages
Better
employment Limited employment,
creation capital intensive, factor
substitution
Influences
aggregate Dependent culture, dominance of developed world,
demand exposure to external shocks, economic vulnerability

Strong capital base, Environmental issues, ecological

capital inflow, FDI, FII, etc. degradation

Global competence, Unfair competition in global market

specialization, export led discourages small entrepreneurs
growth

Investment opportunities
abroad, resource utilization

Harmony in international relations, international

cooperation, global welfare
* Evaluation:-
1. Inward looking policy may lead to stagnation and
limited growth.
2. Outward looking policy creates a threat of economic
vulnerability and exposure to external shocks. It may
lead to crisis.
So, countries can adopt a policy mix of inward and
outward looking policies together. Ex. South Korea,
Chile, Japan are the success stories of such policy mix.