Growth and International Trade

1
Growth and International Trade

• This chapter covers the effects of growth on
  international trading patterns and the terms of
  trade.
• Growth stems from two main sources
• 1. technological change
• 2. increases in the endowment of factors
• The effect of growth depend on the source of
  growth and on the reaction of consumers tastes
  to growth
• growth in the export sector or factor intensively
  used to produce exports can increase trade
• growth in the import sector or factor intensively
  used to produce imports can reduce trade

2
Growth and Trade

• The basic story is
• if a country is small, we know it cant affect
  international prices (the terms of trade)
• if the country is large, it will affect
  international prices when it experiences growth
• Since the effect on prices offset somewhat the
  effects of growth,
• a small country will experience stronger effects
  on its trade pattern than a large country.
• NOTE import goods refer to a countrys import
  competing goods (those produced at home), NOT to
  the imports themselves

3
Production Effects of Growth

• A country starts with a given volume of trade
• growth can cause the country to increase both its
  export and import goods proportionally (this is
  called trade neutral production effect of growth)

4
Production Effects of Growth

• growth can cause both export and import goods to
  grow, with exports increasing more than imports
  (this is called pro-trade production effect of
  growth (area I))

5
Production Effects of Growth

• growth can cause exports to increase and import
  goods to decrease, (this is called
  ultra-pro-trade production effect of growth (area
  II))

6
Production Effects of Growth

• growth can cause both exports and imports to
  grow, with imports increasing more than exports
  (this is called anti-trade production effect of
  growth (area III))
• growth can cause imports to increase and exports
  to decrease, (this is called ultra-anti-trade
  production effect of growth (area IV))
• each of these effects are shown on the following
  graph

7
ultra-anti-trade
anti-trade
pro-trade
ultra-pro-trade
8
Consumption Effects of Growth

• Tastes also change as a country increases its
  output capacity, and the shift in the
  indifference curve can have similar effects to
  the shift in the ppf
• Why? With growth, the income distribution of the
  country changes therefore the people whose
  tastes most strongly determine the distribution
  of income can change
• (Example growth in population due to
  immigration the demand for western music and
  classic movies may fall, and demand for world
  music and anime (sp?) may rise)

9
Consumption Effects of Growth

• Tastes also change as a country increases its
  output capacity, and the shift in the
  indifference curve can have similar effects to
  the shift in the ppf
• growth can cause the country to increase both its
  tastes for exports and imports proportionally
  (this is called trade neutral consumption effect
  of growth)

10
Consumption Effects of Growth

• growth can cause both tastes for exports and
  imports to grow, with export-good demand
  increasing more than demand for imports (this is
  called anti-trade consumption effect of growth
  (area I))
• growth can cause tastes for export goods to
  increase and imports (and import-competing goods)
  to decrease, (this is called ultra-anti-trade
  consumption effect of growth (area II))

11
Consumption Effects of Growth

• growth can cause tastes for both exports and
  imports to grow, with import demand increasing
  more than exports (this is called pro-trade
  consumption effect of growth (area III))
• growth can cause tastes for imports to increase
  and demand for exports to decrease, (this is
  called ultra-pro-trade consumption effect of
  growth (area IV))
• each of these effects are shown on the following
  graph

12
ultra-pro-trade
pro-trade
anti-trade
ultra-anti-trade
13
The Total effect

• the total effect depends on both the consumption
  and production effect. a) both ultra-anti-trade
  --gt total decrease b) pro-trade prod. neutral
  cons.,--gt total increase c) ultra-pro-trade
  production with pro-trade cons.--gt total increase

14
Sources of growth and ppf

• technological change can be neutral, or commodity
  specific

PPF shift from auto-specific tech change
PPF shift from Food specific tech change
15
Increase in factor endowments

• increase in a factor increases production of both
  goods, but has a greater effect on the good that
  uses the factor intensively

16
Note on Technological change

• 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
• Therefore, there is a difference between
  commodity-specific technological change and
  factor-specific technological change