CH6 Economic Growth and International Trade

8/12/2019 CH6 Economic Growth and International Trade

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Chapter 6 Economic Growth

andInternational Trade


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6.1 The connotation of economic growth

In addition to the technological gap and product based on

the trade life cycle is dynamic. All of those trade theory

discussed so far are static. In other words, given a

country's factor endowment, technology, preferences,

we can determine the country's comparative advantage

and gains from trade.

However, the factor endowment changes over

time, technology also often improved, references

can be changed. Therefore, a country's

comparative advantage will change over time.


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Economic growth: the change that a country's per capita

real GDP from one phase to another.

Economic growth is usually expressed with economic

growth rate.

The increase in GDP can be obtained through a varietyof ways, such as increasing factors of production inputs,

such as labor (L), capital (K), with additional input,

output will grow.


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Through technological progress, we can increase the L,

K to improve the efficiency of output levels.

Source of economic growth: the growth of factor inputs,

scientific and technological progress.

Well-known Cobb - Douglas production function:

X=AKL1-


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Economic growth can affects the international

trade from the supply and demand-side aspects .Here let us look at the demand side effects.


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6.2 Changes in demand on internationaltrade

Changes in demand for people'slives and income change has agreat relationship. Adequate food

and clothing and well-off ismeasured in terms of income levels.

Before we come into contact with

the Engel's law, this section hasemerged a new concept related tothis, that Engel effects. Engel's lawis expressed in i, but Engel effect

is expressed in i-1.


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As income increases, a consumerdemand is increasing, i> 1, i-1 ispositive, that is, Engel's effect ispositive.

Several other cases left to our ownderivation. Obviously, Engel's Law

refers to the food Engel effect isnegative.


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Although the Engle had studied thefood , but if we put this issueextended to the entire internationaltrade of primary products, particularlyagricultural products, we will find thatsignificance of Engel effects .


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U.S. economist Kindleberger and Lewismade a empirical study, then give aconclude:

the exporting country's terms of trade ofprimary products (agricultural and mineral)gradually deteriorated along the economicgrowth because as people's income isincreased, the demand shifts in preferences,greater demand for industrial products, so

the prices of primary products decline indemand due to falling prices, and now hasto import the same amount ofmanufactured goods to be exportedprimary products, the number is growing.


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6.3 The growth of production factor oninternational trade

Last section, we discuss the economicgrowth on international trade fromthe perspective of the changing needs.This section we will discuss theeconomic growth on internationaltrade from the perspective of supply


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The factors that affect the Changes ofsupply of terms are the growth 0fproduction factor and technologicalprogress.Let us be analyzed separately.


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6.3.1The growth of factors of production

Typically, a country's population andthe number of labor force (L) willgrow over time. Similarly, throughthe use of some resources toproductive capital (K) device, acountry's capital stock will increase.


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Capital refers to all means ofproduction made by people, such asmachinery, factories, office buildings,transport and communication tools,including workforce education andtraining, all of which greatly increase

a country's ability to produce goodsand services.


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0

70

140

140 280X

Y

B

B


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6.3.2 factors of production growth in thecase of neutral

If the growth rate of labor and capitalis the same , production possibilitiescurve will be two elements of thegrowth rate of emigration in bothdirections simultaneously. The resultsof the old and new two curves

(growth factor before and after) theslope of the same points.


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6.3.3The case of factors of productiongrowth in the production of importedgoods

If the factors of production growth is not atthe same time by the same percentagechange, the situation is more complex than

the first number. It depends on theelements of this change belongs to whichcountry, which used to produce what kindof product, is used to produce import

substitution goods, or is used to produceexport goods?

Situation is different, the impact oninternational trade are also different.


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Assume that the growth of factors ofproduction is used to produce importsubstitution goods.

If the United States produce wheat, andtextiles. Relative of wheat, the textiles andapparel products are capital-intensive.

Now assume that the number of U.S.capital increase, while production of factorsof production of wheat has not grown.


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Capital growth, due to the increase incapital supply, so the price of capitalthat the interest rate will be reduced.Because of this element of capitalcheaper than the original, will lead tomore companies using capital,

therefore, the U.S. textile relative towheat is to increase, imports will bereduced.


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Conclusion: The substitution ofimported goods used in theproduction of growth factors ofproduction would lead to reduction inthe number of imports.


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0

B

C

B

C

D

D

A

A

1/1

1/1

20 60

8075

55

40

55 75 80

B2080

C6040

40

40

B5575

C7555

20

20


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6.3.4 The case of factors ofproduction growth in the production

of exported goods Analysis on this point is precisely

reversed to the previous point .Wehere only give conclusions.

See textbook P109:Before growth factors of production :Production point B (80 wheat, 20textile)Consumption point C (40 wheat, 60textile)Wheat exports 40Textiles imports 40


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After factors of production growth:Production point B '(110 wheat, 15textile)Consumption point C '(50 wheat, 75textile)Wheat exports 60

textiles imports 60


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Conclusion: Expanding the scale ofworld trade, if the country's share ofworld trade is large , it will leadtextiles prices rose , wheat prices fell.The same rules have effect subject tothe supply, only the domestic market

replaced by the international market. From this we lead to an important

theorem, which Rybczyski Theorem.


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6.3.5Rybczyski Theorem

Suppose a country produces only twoproducts, under the premise of fixedprices , a growth of production factorwill lead to production of sectorintensively use of factors increasedand production of other intensively

use of factors declined.


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2014/6/1426

YX

E

E

X

Y

L0

K

K


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Important conclusions:

The growth of production factors that

can produce imports would reducethe demand for imported goods,thereby improving their terms oftrade;

The growth of production factors thatcan produce exports would increasethe supply of exports, leading to

worsening terms of trade.


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This point is particularly important tothe export-oriented enterprises . Asexports increasing , it must alsoconcerned about the possiblenegative effects of terms of trade, toavoid disadvantages.


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6.3.6 Immiserizing growth andDutch disease

In general, economic growth is a goodthing, but there are specialcircumstances, which when unbalanced

economic growth, economic growthcould adversely affect a country'seconomy.


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Therefore, we should pay attention todistinguish between economic growthand economic development, the

concepts mentioned here are thestrange phenomenon caused by growthof economic imbalances .


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Dutch disease: the growth and theexpansion of one industry led tocontraction of other industries. From

the Netherlands, hence the name.Other countries occurred the samephenomenon.


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Immiserizing growth also be calledBhagwati effect. The increase ofexport capacity may have adverse

effects on terms of trade and thedomestic economy.


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the main reasons of Bhagwati effect :the deterioration of terms of trade.

After the economic growth ,if thedecline of a social welfare benefitscaused by worsening terms of trade ismore than that caused by economic

growth , poverty growth can occur.


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0 B

T

B

T

UU

b

b

g

g

Y

Y

A

A

c

c

X

Y

coffee

manufactured goods

X


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Before growth :Exports of coffee gb, importsmanufactured goods cg

Terms of trade: cg / gbAfter growth:Exports of coffee g'b ', imported

manufactured goods c'g'Terms of trade: c'g '/ g'b'


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Since: c'g '/ g'b'


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Poverty growth assumptions:

First, the country's merchandiseexports in the world account for a

large share of the market; Second, productivity growth in the

country concentrated in the exportproduction sector;

Third, the international marketelasticity of demand for suchcommodities lower.


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Section IV technological

progress on internationaltrade


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1. the meaning and types oftechnological progress

Technological progress oninternational trade theory we havelearned are: technological gap theoryand the product life cycle theory.


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Here to discuss the growth of theproduction capacity brought bytechnological innovations how to

affect international trade


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Hicks on the classification oftechnological progress:

Neutral technological progress: laborand capital productivity increased inthe same proportion ,if the relativeprice (wage rates / interest rates)

unchanged, the ratio that producedthe same amount of goods needed forthe capital and labor decreased, K / Lconstant.


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Labor-saving technological progress:the improvement of capitalproductivity is faster than labor

productivity. Based on the relativeprice (wage rate / interest rate)unchanged, part of the labor force in

production was replaced by capital, K/ L increased.


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Capital-saving technological progress:the improvement of labor productivityis greater than capital productivity.

Based on the relative price (wagerate / interest rate) unchanged, partof the capital in production was

replaced by labor, K / L be reduced.


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Factors of production decreased, butnot so reduced proportionally. Someuse less capital and labor with

relatively more, or, to use morecapital per unit of labor, this is themeaning of saving the capital.


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Technical progress impact on theproduction possibilities curve:

0X

Y

A0

B0

A2

B2

A1

B1B3

A3


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2. Technological progress andinternational trade

Technological progress affected thestructure of products in internationaltrade and trade patterns.

Trade exporters are basicallydeveloped and newly industrializedcountries, while the primary product

producing countries in internationaltrade is increasingly unfavorableposition


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The impact of technological progresson international trade depends onwhat factors of production have

changed caused by technologicalprogress.

(1) The impact of neutral technical

progress on international trade


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Technological progress in labor-intensiveindustries:

Products increased. Produced the imported products, while

imports decreased. Technological progress in capital-intensive

industries : Products increased.

Produced the export products, while theexports increased; produced imports, whileimports decreased.


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(2) the impact of labor-savingtechnological progress oninternational trade

Technological progress in labor-intensive industries:

The same results with neutral

technical progress


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Technological progress in capital-intensiveindustries:

* The degree of capital-intensity and labor

saving is also higher : the industry's outputwill not be much growth and import andexport volume would not be a big change.

* The degree of capital-intensity and labor

saving is not higher: the industry will havegreater output growth, changes in importand export volume will be greater.


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(3) the impact of capital-savingtechnological progress oninternational trade

Technological progress in capital-intensive industries: the same as withneutral technical progress.


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Technological advances in labor-intensive industries: the impact mustbe decided according to labor

intensity and the extent of capitalsavings.

Documents

CH6 Economic Growth and International Trade