1. Economic Growth and International Trade
Chapter 11
Economic Growth and International Trade
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives
Distinguish different ways growth can affect trade.
Discuss how the source of growth affects the nature of production and trade.
Summarize how growth and trade affect welfare in the small country.
Assess how growth in a large country can have different effects than growth in a small country.

3. Introduction How does economic growth in China affect other countries?
Has China’s growth come at the expense of other countries?

4. The Trade Effects of Growth
As real income rises,
producers are affected: how should they alter production in response?
consumers are also affected: how should they spend the additional income?

5. Trade Effects of Production Growth
If a country experiences growth its PPF will shift outwards.
The producers in that country will now have the chance to select a production point on the new PPF.
Suppose a country exports good X and imports good Y.

6. Trade Effects of Production GrowthY IV
III I II A X

7. Trade Effects of Production Growth
New production points in region II of the new PPF involve production of more of the export good (Y) and less of the import good (X).
This is ultra-protrade production growth.
This means the growth has a strong positive effect on the country’s desire to trade.

8. Trade Effects of Production Growth
New production points in region I of the new PPF involve production of more of the both goods, but proportionately more of the export good (X).
This is protrade production growth.
This growth will have a positive effect on the country’s desire to trade.

9. Trade Effects of Production Growth
New production points in region IV of the new PPF involve production of more of the import good (Y) and less of the export good (X).
This is ultra-antitrade production growth.
This means the growth has a strong negative effect on the country’s desire to trade.

10. Trade Effects of Production Growth
New production points in region III of the new PPF involve production of more of the both goods, but proportionately more of the import good (Y).
This is antitrade production growth.
This growth will have a negative effect on the country’s desire to trade.

11. Trade Effects of Consumption Growth
If a country experiences growth, the consumers in that country will now have the chance to select a new consumption point.
Let us continue to suppose a country exports good X and imports good Y.
To focus on consumption, we’ll look only at the consumption possibilities frontier (CPF).

12. Trade Effects of Consumption Growth
III IV Y I II B
CPF X

13. Trade Effects of Consumption Growth
New consumption points in region II of the new CPF involve consumption of more of the export good (Y) and less of the import good (X).
This is ultra-antitrade consumption effect.
This means the growth has a strong negative effect on the country’s desire to trade.

14. Trade Effects of Consumption Growth
New consumption points in region I of the new CPF involve consumption of more of the both goods, but proportionately more of the export good (X).
This is antitrade consumption effect.
This growth will have a negative effect on the country’s desire to trade.

15. Trade Effects of Consumption Growth
New consumption points in region IV of the new CPF involve consumption of more of the import good (Y) and less of the export good (X).
This is ultra-protrade consumption effect.
This means the growth has a strong positive effect on the country’s desire to trade.

16. Trade Effects of Consumption Growth
New consumption points in region III of the new PPF involve consumption of more of the both goods, but proportionately more of the import good (Y).
This is a protrade consumption effect.
This growth will have a positive effect on the country’s desire to trade.

17. Production and Consumption Effects Combined
To summarize the combined production and consumption effects of growth, we look at the income elasticity of demand for imports (YEM).
YEM is the percentage change in imports divided by the percentage change in national income.

18. Production and Consumption Effects Combined
YEM = 1: neutral effect
0 < YEM < 1: antitrade effect
YEM < 0: ultra-antitrade effect
YEM > 1: protrade or untra-protrade effect

19. Sources of Growth Technological change
Factor-neutral: results in same relative amounts of K and L are used.
Labor-saving: results in increases in relative amount of capital used.
Capital-saving: results in increases in relative amount of labor used.

20. Technological Change: Commodity-neutralX

21. Technological Change: Commodity-specificX X
11-21

22. Sources of Growth Factor Growth
Factor-neutral: K and L grow at the same rate.
Growth in K
Growth in L

23. Factor Growth: Factor-neutralY X

24. Factor Growth: Factor-specific
Growth of factor
in which good Y
production is intensive.
Growth of factor
in which good X
production is intensive. Y Y X X
11-24

25. Factor Growth and Trade: Small Country Case
Suppose good X is relatively labor-intensive, and Y is capital intensive.
Economic growth shifts the PPF disproportionately along the X-axis.
Since country is small international prices don’t change.

26. Factor Growth and Trade
(Px/Py)intl Y
Production of L-intensive
good rises; production of
K-intensive good falls. Y1 E1 E2 Y2 X1 X2 X

27. Factor Growth and Trade: the Rybczynski Theorem
Growth in one factor of production leads to
an absolute expansion of output of the product using that factor intensively and
an absolute contraction of output of the product using the other factor intensively.

28. Factor Growth and Trade: the Rybczynski Theorem
If the abundant factor grows, there will be an ultra-protrade production effect.
If the scarce factor grows, there will be an ultra-antitrade production effect.
If the consumption effect is protrade, growth in abundant factor will increase trade overall; growth in scarce factor causes the opposite.

29. Growth and Trade: Welfare Effects
Growth in K or technological improvements will generally increase welfare, since both increase real per capita income and allow a country to reach a higher indifference curve.
Growth in L may or may not increase welfare.

30. Factor Growth and Trade: Large Country Case
Suppose a large country experiences growth in its abundant factor.
There will be an ulra-protrade production effect.
Assuming a neutral consumption effect, the growth will cause an increase in demand for imports and an increase in the supply of exports.
The increased willingness to trade leads to a deterioration in the country’s terms of trade.

31. Large Country Case (Px/Py)0 Y Growth causes a decline in
the TOT to (Px/Py)1. Growth
increases welfare, but not as
much as in the small country
case. C1 C2 C0 E2 E0 E1
(Px/Py)1 X

32. Growth and Trade: Immiserizing Growth
It is possible that the deterioration in the terms of trade will be large enough that a country with growth finds itself on a lower indifference curve.
This phenomenon was dubbed “immiserizing growth” by Jagdish Bhagwati.

33. Immiserizing Growth (Px/Py)0 Growth causes a large
enough decline in that
welfare is reduced. Y C0 C1 C2 E2
(Px/Py)1 E0 E1 X

34. Growth and the Terms of Trade: Developing Countries
Developing countries may experience declining terms of trade as they grow; this suggests a strategy of export product diversification.
Income elasticities of demand for minerals and food products tend to be low; those for manufactured goods tend to be higher.
Prices of non-petroleum primary products have generally declined over time.