Chapter 6 Economic Growth and International Trade

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.

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 variety of ways, such as increasing factors of production inputs,
such as labor (L), capital (K), with additional input, output will grow.

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-

Economic growth can affects the international trade from the supply and demand-side aspects . Here let us look at the demand side effects.

6.2 Changes in demand on international trade

Changes in demand for people's lives and income change has a great relationship. Adequate food and clothing and well-off is measured in terms of income levels. Before we come into contact with the Engel's law, this section has emerged a new concept related to this, that Engel effects. Engel's law is expressed in i, but Engel effect is expressed in i-1.

 As income increases, a consumer demand is increasing, i> 1, i-1 is positive, that is, Engel's effect is positive. Several other cases left to our own derivation. Obviously, Engel's Law refers to the food Engel effect is negative.

 Although the Engle had studied the food , but if we put this issue extended to the entire international trade of primary products, particularly agricultural products, we will find that significance of Engel effects .

 U.S. economist Kindleberger and Lewis made a empirical study, then give a conclude: the exporting country's terms of trade of primary products (agricultural and mineral) gradually deteriorated along the economic growth because as people's income is increased, the demand shifts in preferences, greater demand for industrial products, so the prices of primary products decline in demand due to falling prices, and now has to import the same amount of manufactured goods to be exported primary products, the number is growing.

 Thus, developing countries exports of primary products are always more and more clear that is not conducive to improved terms of trade and in international trade patterns in the advancement. This is why developing countries to try to do everything possible to complete the industrialization .

6.3 The growth of production factor on international trade

Last section, we discuss the economic growth on international trade from the perspective of the changing needs. This section we will discuss the economic growth on international trade from the perspective of supply

 The factors that affect the Changes of supply of terms are the growth 0f production factor and technological progress. Let us be analyzed separately.

6.3.1The growth of factors of production Typically, a country's population and the number of labor force (L) will grow over time. Similarly, through the use of some resources to productive capital (K) device, a country's capital stock will increase.

 Capital refers to all means of production made by people, such as machinery, factories, office buildings, transport and communication tools, including workforce education and training, all of which greatly increase a country's ability to produce goods and services.

140

B 70

140

280

6.3.2 factors of production growth in the case of neutral

If the growth rate of labor and capital is the same , production possibilities curve will be two elements of the growth rate of emigration in both directions simultaneously. The results of the old and new two curves (growth factor before and after) the slope of the same points.

6.3.3The case of factors of production growth in the production of imported goods

If the factors of production growth is not at the same time by the same percentage change, the situation is more complex than the first number. It depends on the elements of this change belongs to which country, which used to produce what kind of product, is used to produce import substitution goods, or is used to produce export goods? Situation is different, the impact on international trade are also different.

 Assume that the growth of factors of production is used to produce import substitution goods. If the United States produce wheat, and textiles. Relative of wheat, the textiles and apparel products are capital-intensive. Now assume that the number of U.S. capital increase, while production of factors of production of wheat has not grown.

 Capital growth, due to the increase in capital supply, so the price of capital that the interest rate will be reduced. Because of this element of capital cheaper than the original, will lead to more companies using capital, therefore, the U.S. textile relative to wheat is to increase, imports will be reduced.

 Conclusion: The substitution of imported goods used in the production of growth factors of production would lead to reduction in the number of imports.

B2080 C6040 40

A A 80 75 55 40 C B B C

40

B5575 C7555 20 20

1/1
D 0 20 55 60 75 80 1/1

6.3.4 The case of factors of production growth in the production of exported goods
Analysis on this point is precisely reversed to the previous point .We here only give conclusions. See textbook P109: Before growth factors of production : Production point B (80 wheat, 20 textile) Consumption point C (40 wheat, 60 textile) Wheat exports 40 Textiles imports 40

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

 Conclusion: Expanding the scale of world trade, if the country's share of world trade is large , it will lead textiles prices rose , wheat prices fell. The same rules have effect subject to the supply, only the domestic market replaced by the international market. From this we lead to an important theorem, which Rybczyski Theorem.

6.3.5 Rybczyski Theorem

Suppose a country produces only two products, under the premise of fixed prices , a growth of production factor will lead to production of sector intensively use of factors increased and production of other intensively use of factors declined.

K X K X Y Y

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 Important conclusions: The growth of production factors that can produce imports would reduce the demand for imported goods, thereby improving their terms of trade; The growth of production factors that can produce exports would increase the supply of exports, leading to worsening terms of trade.

 This point is particularly important to the export-oriented enterprises . As exports increasing , it must also concerned about the possible negative effects of terms of trade, to avoid disadvantages.

6.3.6 Immiserizing growth and Dutch disease

In general, economic growth is a good thing, but there are special circumstances, which when unbalanced economic growth, economic growth could adversely affect a country's economy.

 Therefore, we should pay attention to distinguish between economic growth and economic development, the concepts mentioned here are the strange phenomenon caused by growth of economic imbalances .

 Dutch disease: the growth and the expansion of one industry led to contraction of other industries. From the Netherlands, hence the name. Other countries occurred the same phenomenon.

 Immiserizing growth also be called Bhagwati effect. The increase of export capacity may have adverse effects on terms of trade and the domestic economy.

 the main reasons of Bhagwati effect : the deterioration of terms of trade. After the economic growth ,if the decline of a social welfare benefits caused by worsening terms of trade is more than that caused by economic growth , poverty growth can occur.

manufactured goods

Y c A g A

c U b

g Y

T
0 X B B X

coffee

 Before growth : Exports of coffee gb, imports manufactured goods cg Terms of trade: cg / gb After growth: Exports of coffee g'b ', imported manufactured goods c'g' Terms of trade: c'g '/ g'b'

 Since: c'g '/ g'b' <cg / gb Conclusion: The worsening terms of trade, poverty growth appears comparing the indifference curve, the more near from the origin, the smaller utility. The more coffee exports, the more overall consumer and social welfare decline , this is the growth of poverty.

 Poverty growth assumptions: First, the country's merchandise exports in the world account for a large share of the market; Second, productivity growth in the country concentrated in the export production sector; Third, the international market elasticity of demand for such commodities lower.

Section IV technological progress on international trade

 1. the meaning and types of technological progress Technological progress on international trade theory we have learned are: technological gap theory and the product life cycle theory.

 Here to discuss the growth of the production capacity brought by technological innovations how to affect international trade

 Hicks on the classification of technological progress: Neutral technological progress: labor and capital productivity increased in the same proportion ,if the relative price (wage rates / interest rates) unchanged, the ratio that produced the same amount of goods needed for the capital and labor decreased, K / L constant.

 Labor-saving technological progress: the improvement of capital productivity is faster than labor productivity. Based on the relative price (wage rate / interest rate) unchanged, part of the labor force in production was replaced by capital, K / L increased.

 Factors of production decreased, but not so reduced proportionally. Some use less labor, with relatively more capital, or, for every unit of labor is now using more capital. This is the meaning of saving labor.

 Capital-saving technological progress: the improvement of labor productivity is greater than capital productivity. Based on the relative price (wage rate / interest rate) unchanged, part of the capital in production was replaced by labor, K / L be reduced.

 Factors of production decreased, but not so reduced proportionally. Some use less capital and labor with relatively more, or, to use more capital per unit of labor, this is the meaning of saving the capital.

Technical progress impact on the production possibilities curve:

Y

A3

A2 A1 A0

X B0

B3

B2

B1

2. Technological progress and international trade

Technological progress affected the structure of products in international trade and trade patterns. Trade exporters are basically developed and newly industrialized countries, while the primary product producing countries in international trade is increasingly unfavorable position

 The impact of technological progress on international trade depends on what factors of production have changed caused by technological progress. (1) The impact of neutral technical progress on international trade

 Technological progress in labor-intensive industries: Products increased. Produced the imported products, while imports decreased. Technological progress in capital-intensive industries : Products increased. Produced the export products, while the exports increased; produced imports, while imports decreased.

 (2) the impact of labor-saving technological progress on international trade Technological progress in laborintensive industries: The same results with neutral technical progress

 Technological progress in capital-intensive industries: * The degree of capital-intensity and labor saving is also higher : the industry's output will not be much growth and import and export volume would not be a big change. * The degree of capital-intensity and labor saving is not higher: the industry will have greater output growth, changes in import and export volume will be greater.

 (3) the impact of capital-saving technological progress on international trade Technological progress in capitalintensive industries: the same as with neutral technical progress.

 Technological advances in laborintensive industries: the impact must be decided according to labor intensity and the extent of capital savings.