1. Introduction: Trade can affect growth

6. 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

7. 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.

8. 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.
Wide concerns about further reduction in trade barriers
Example: s: many less developed countries pursued inward oriented policies of import substitution
LDCs noted that as a result of trade, prices of primary products were too low and they could not compete with developed country levels of protection
Import Substitution: developing new industries, especially in manufacturing, at the expense of other industries (often mining and agriculture).
The idea is to substitute imports for domestically produced goods and services.
To do this, these import substitution industries need to be protected from international competition.
Import substation 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. Large welfare costs to countries with strong import substituting policies.
Question: what are the effects of economic growth on trade?

9. Endowment growth and problems faced by primary product exporters
Countries that export mostly ‘primary products’ (agriculture and natural resources) as opposed to manufactured goods.
1st Problem: Volatility of export earnings
export earnings on these goods 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
Volatility in key prices for primary products is especially critical

10. Endowment growth and problems faced by primary product exporters
2nd 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, and 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, and yet the country continues to experience low per capita income and low quality of life
Angola, Nigeria, Sudan, and the Congo
3rd Problem: deteriorating terms of trade
What is worse than price volatility? Price decline
Immiserating growth

11. 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

12. 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
Suppose 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

13. 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

14. 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

15. 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

16. 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

17. 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