Introduction: Trade can affect growth

Understanding Trade and Economic Growth - Role of new technology Example: The Green Revolution The process of technological development of agricultural techniques that began in the northern Mexican state of Sonora in 1944 It has since spread throughout the world. Goal: to increase the efficiency of agricultural processes so that the productivity of the crops increased to help developing countries face their growing populations' needs

Understanding Trade and Economic Growth - Role of new technology Example: The Green Revolution Technologies fell into two major categories Breeding new plant varieties High yielding plant varieties and hybrids to increase crop yield, crop durability and other features Applying modern agricultural techniques Chemical fertilizers, irrigation, machinery, pesticides and herbicides Side effect of the Green Revolution Some net food importing countries became net food exporting countries Point: growth can change patterns of trade.

Introduction: How can trade impact economic growth? Economic Growth ⇒ Trade But also Trade (and lack of) ⇒ Economic growth While we know there are gains from trade, there are also costs, which tend to be highly concentrated. Thus there are wide concerns about ↓ in trade barriers Example: 1950-1960s: many less developed countries pursued inward oriented policies of import substitution LDCs noted that as a result of trade, international prices of primary products were too low  LDCs could not compete w/developed country protectionism Import Substitution: developing new industries, especially in manufacturing, at the expense of other industries (often mining and agriculture). Idea: substitute foreign imports for domestically produced goods/services. To work: import substitution industries need protection from international competition. Import substitution also was applied to many agricultural commodities in LDCs in the name of self-sufficiency and food security. Problems: protected industries rarely succeed on their own. Lack of trade caused welfare costs. Question: what are the effects of economic growth on trade?

Endowment growth and problems faced by primary product exporters Primary products: agricultural commodities and natural resources, as opposed to manufactured goods. 1st Problem: Volatility of export earnings export earnings on primary products may be more vulnerable to changes in international prices. Price volatility (↑↓) impacts export earnings which impacts: Standard of living Macroeconomic investment →long run growth Import purchasing power

Endowment growth and problems faced by primary product exporters 2nd Problem: deteriorating terms of trade What is worse than price volatility? Price decline Immiserizing growth In reality some argue that cases are difficult to find. For immiserizing growth to occur, the import demand must be relatively inelastic (no close substitutes).

Endowment growth and problems faced by primary product exporters 3rd Problem: Curse of natural resources Resource curse theory: an abundance of easily obtainable natural resources may encourage internal political corruption underinvestment in domestic human capital a decline in the competitiveness of other economic sectors →hurting prospects for growth and democratization. Ex: Many African countries are rich in oil, diamonds, or other minerals Yet the country continues to experience low per capita income and low quality of life Angola, Nigeria, Sudan, and the Congo

Technology and Trade Growth and Trade models rely on the HO Framework HO assumes: differences in factor endowments (but same technology) However, PPF can grow either due to an increase in factor endowments or due to a technological change. Think about: differences in production technology Technological differences can skew production toward products in which the country has a relatively better technology Countries experience technological change – but at different times, rates and sectors.   Where does technology come from? Mostly through organized efforts called R&D. This technology can be spread internationally through trade: Diffusion

Technology and Trade: Imitation Lag Hypothesis Start: Imitation Lag Hypothesis (M.V. Posner,1960) Relax assumption of HO of same technology Two countries: U.S., China where the U.S. invents a new product Imitation lag: product will not be produced immediately by firms in China 1st: China needs to acquire the knowledge & know-how to produce the product 2nd: China needs to purchase new inputs, install equipment and bring the product to market Demand lag: product may not be accepted immediately in China Chinese consumers will take time to substitute from old version to new version of product Net lag: Imitation lag - demand lag = time U.S. has to export to China

Technology and Trade: The Product Cycle Next: The Product Cycle Hypothesis builds on Imitation Lag Hypothesis (Raymond Vernon, 1966) Relax more assumptions of HO Hypothesis is concerned with the life cycle of a typical new manufacturing product. Hypothesis: new products pass through a series of stages in the course of their development Comparative advantage of producers in innovating countries change as the product moves through this cycle. 4 product life cycles determine the innovative country’s trade position

Technology and Trade: The Product Cycle Product development and sale in the innovative country’s market “New Product Stage” Locating production close to buyers No international trade takes place

Technology and Trade: The Product Cycle Growth in innovative country’s exports as foreign demand is cultivated “maturing product stage” General standards for the product emerge Mass production techniques are beginning to be adopted Economies of scale start to be realized Foreign demand is driven from other developed countries Innovative country begins to export

Technology and Trade: The Product Cycle Decline in innovating country exports as foreign production abroad begins to serve foreign markets “standardized product stage” Foreign demand growth warrants production in the foreign markets Product has become more standardized Shift from a high skill intensive product to a low skill intensive product Production may shift to developing countries Innovating country exports decline

Technology and Trade: The Product Cycle Innovative country becomes a net importer as foreign prices fall The pattern of trade switches, in part due to differences in labor costs Ex: U.S. applies their abundance of high skilled labor toward innovative products and start off as the exporter U.S. eventually imports the final good from countries with an abundance of low skilled labor Factor endowments and factor prices still play a role

Openness to trade affects growth Openness to trade provides access to new and improved products. Closed trade ⇒ can cut countries off from technological diffusion Openness to trade can also have an impact on the incentive to innovate. Trade can provide additional competitive pressure on the country’s firms. Can drive firms to seek better technology and raise productivity. Trade provides a larger market to provide additional returns to innovation