Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Chapter 12 Trade Theory and Development Experience

Copyright © 2006 Pearson Addison-Wesley. All rights reserved International Trade and Finance: Some Key Issues n Many LDCs rely heavily on exports (usually primary products) n Many LDCs also rely heavily on imports (typically of machinery, capital goods, intermediate producer goods, and consumer products)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Table 12.1

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Five Basic Questions about Trade and Development n How does international trade affect economic growth? n How does trade alter the distribution of income? n How can trade promote development? n Can LDCs determine how much they trade? n Is an outward-looking or an inward-looking trade policy best?

Copyright © 2006 Pearson Addison-Wesley. All rights reserved The Importance of Trade for Development n LDC exports: trends and patterns (see Table 12.2) n Importance of exports to developing nations

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Table 12.2

Copyright © 2006 Pearson Addison-Wesley. All rights reserved The Importance of Trade for Development n LDC exports: trends and patterns n Importance of exports to different developing nations n Demand elasticities and export earnings instability

Copyright © 2006 Pearson Addison-Wesley. All rights reserved The Terms of Trade and the Prebisch-Singer Thesis n Total export earnings depend on: –Total volume of exports sold AND –Price paid for exports n Prebisch and Singer argue that export prices fall over time, so LDCs lose revenue unless they can continually increase export volumes n Prebisch and Singer think LDCs need to avoid a dependence on primary exports

Copyright © 2006 Pearson Addison-Wesley. All rights reserved The Traditional Theory of International Trade n The principle of comparative advantage n Relative factor endowments and international specialization: the Neoclassical model

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Figure 12.1

Copyright © 2006 Pearson Addison-Wesley. All rights reserved The Traditional Theory of International Trade n The principle of comparative advantage n Relative factor endowments and international specialization: the Neoclassical model n Trade theory and development: the traditional arguments

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Some Criticisms of Traditional Free-Trade Theory in the Context of Developing- Country Experience n Six assumptions of the Neoclassical model must be scrutinized:

Copyright © 2006 Pearson Addison-Wesley. All rights reserved The Six Assumptions n The following assumptions of the Neoclassical model must be scrutinized: –Fixed resources, full employment, and international factor immobility –Fixed, freely available technology and consumer sovereignty –Internal factor mobility and perfect competition –Governmental non-interference in trade

Copyright © 2006 Pearson Addison-Wesley. All rights reserved The Six Assumptions (cont’d) –Balanced trade and international price adjustments –Trade gains accruing to nationals

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Figure 12.2

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Some Conclusions on Trade Theory and Economic Development Strategy n Trade can lead to rapid economic growth under some circumstances n Trade seems to reinforce existing income inequalities n Trade can benefit LDCs if they can extract trade concessions from developed countries n LDCs generally must trade n Regional cooperation may help LDCs

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Figure 12.3

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Concepts for Review n Absolute advantage n Balanced trade n Barter transactions n Capital account n Collective self-reliance n Collusion n Commodity terms of trade n Comparative advantage n Current account n Enclave economies n Export dependence n Export earnings instability n Factor endowment trade theory

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Concepts for Review (cont’d) n Factor mobility n Factor-price equalization n Foreign-exchange earnings n Free trade n Gains from trade n Globalization n Growth poles n Income elasticity of demand n Income terms of trade n Increasing returns n Industrial policy n Monopolistic market control

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Concepts for Review (cont’d) n North-south trade models n Oligopolistic market control n Prebisch-Singer thesis n Price elasticity of demand n Primary products n Product cycle n Product differentiation n Quotas n Regional trading blocks n Returns to scale n Risk n Specialization

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Concepts for Review (cont’d) n Subsidies n Synthetic substitutes n Tariffs n Trade deficits n Uncertainty n Vent-for-surplus theory of international trade