Chapter 6: Growth and Trade Topics in chapter 6: Trade and economic growth The Rybczynski theorem (and how to spell the name Rybczynski) The Dutch Disease Immiserizing growth Technology and trade

Economic growth What do we mean with ”economic growth” ? Growth refers to increase in productive capacity and not short run factor utilisation Increase in productive capacity can change the international trade pattern

Economic growth Economic growth shifts the production possibility curve outwards How does this affect production and trade ?

Economic growth The following terms are used Balanced growth – ppc shifts out proportionally so that its relative shape stays the same, and production of the two goods increases proportionally the same Biased growth – ppc shifts are skewed in favour of one particular good. Factors of production grow at different rates, or technological improvement are larger in one sector than another

Balanced growth

Biased growth

Tadeusz Rybcsynski …assuming goods prices are constant, growth in the country`s endowment of one factor of production, with the other factor unchanged, results in an increase in the output of the good that uses the growing factor intensively, and a decrease in the output of the other good

The Rybcsynski theorem

The Dutch disease The Ryb. theorem suggests that develop-ment of a new natural resource such as oil or gas may retard development of other lines of production, such as manufactures This effect has been observed many times, perhaps well known is the Dutch disease following the large gas resources developed in the Netherlands, which led to de-industrialisation and a painful period of recovery

Terms of trade A country`s terms of trade, defined as export prices/import prices, is of crucial importance for a country`s economic well being Economic growth may affect terms of trade in a detrimental way Small country: terms of trade are given Large country: terms of trade may be affected by own production and supply

Large country – tot falls

Growth may be bad for you Let`s assume the following happens Growth is strongly biased in favour of the export good and is strong enough to affect (lower) prices, and Export demand is price inelastic The export prices may be lowered so much that welfare actually decreases (immiserising growth)

Technology and trade In the H-O model, technology is exogenous and freely available to all This is not the case in the real world, where technological differences may themselves foster trade Raymond Vernon`s product cycle hypothesis attempts to show where a good is produced and exported over its life cycle