7: Trade Technology And Growth (Static vs Dynamic, Tech Gap theory, Product cycle theory, endogenous growth theory)

Question 1

4 topics within this

Answer 1

Static vs dynamic gains to trade

Technology gap theory (short)

Product cycle theory (Krugman N/S model (effect of i and t) + Dollar (production costs matter - shown by increased population in South lowers production (labour costs) and thus rate of t increases)

Trade and growth (endogenous growth- depends on rate of t i.e imitation more = innovate more)

Question 2

What are the static gains from trade (2)

B) what do static gains result in?

Answer 2

Production gains: FoP relocated to industries with higher productivity (trade means only productive survive!)

Consumption gains: Exchange goods at better terms trade

B) transitional growth

Question 3

Dynamic gains from trade (7)

Answer 3

Persistent shocks to terms of trade increase welfare

Expansion to potential markets and deeper specialisation (since access larger markets)

Increased capital accumulation (trade creates higher saving/investment rates)

Diffusion of technology - trade facilitates transfer of advanced tech

Stimulation of product and process innovations

Pro-competitive effects: trade reduces market power for monopolies by introducing foreign competition

Reallocation of FoP at firm level

Question 4

Persistent shocks to terms of trade: if improvement in TOT persists, what happens to country welfare

Answer 4

Continuously improves

Question 5

Negative example of persistent shocks to ToT

Answer 5

Relative prices of primary products have been persistently falling in recent years, creating ToT deterioration for developing countries (who export mainly primary products), thus hindering their growth

Question 6

2. Market expansion and deeper specialisation: how does trade allow this

Answer 6

Trade opens up larger markets, allowing for EOS and deeper specialisation, increase specialisation improves productivity

Question 7

Diffusion of tech - global markets facilities transfer of advanced tech across countries to boost productivity.

But what decides how much of this tech will actually be absorbed

Answer 7

The recipient’s existing human capital (to be able to use the new advanced tech)

Question 8

Trade stimulates product/process innovation (encourages firms to innovate)

What is this key for (2)

Answer 8

Key for successful market entry and securing market position

Question 9

Trade creates pro-competitive effects (2)

Answer 9

Trade reduces market power for monopolies by foreign competition.

Trade increases returns to R&D (since larger market to access + more knowledge learning)

Question 10

2nd topic:
Technology gap theory (Posner)

Answer 10

Difference in rate of tech growth/innovation is a cause of trade

Question 11

Demand vs imitation gap

B) how does this explain why trade occurs

Answer 11

Demand gap is the time taken for demand to arise in a foreign country for a good.

Imitation gap is the time taken for foreign producers to use new tech to produce the good themselves

B) trade occurs because demand gap is shorter than imitation gap (foreign producers react slower, and thus foreign people import the good)

Question 12

3rd topic:
Product cycle model: 3 stages

Answer 12

Stage 1: innovation occurs in high income country, production takes place there too. They export

Stage 2: demand for product expands, Production moves to other developed countries. Human capital becomes less important

Stage 3: tech becomes completely standardised, production moves to low-wage developing countries, so unskilled labour costs now matter

Question 13

Product cycle model diagram

Answer 13

Blue line represents the trade flows of innovating country. They export during stage 1, but then into stage 2 it falls (as production moves to other developed countries, then stage 3 they import (since production moves towards developING countries)

Green line for developing countries: negative (importing until stage 3.

Red for Other developed countries, start exporting midway stage 2, then fall off in stage 3 since production moves away and to developING countries

Question 14

Krugman added to the product cycle model:

Assumptions
How many FoP
How many regions
Where is higher wage region
Goods produced can be split into
Where can each goods be produced

B) where will goods be produced
C) what are the price of each good (Pn and Ps)

Answer 14

Labour only factor
North and South. Wages higher in north (Wn>Ws)
n goods, divided into new goods (nN) and old (nS)
New goods produced in north, old anywhere

B) old goods produced in South as low wages. North produce new goods

C) Pn = Wn , Ps = Ws

Question 15

Demand for new goods relative to old goods depends on what?

B) expression

Answer 15

Depends on relative prices! which means also wages

Qn/Qs = Pn/Ps to the -(1/1-α)
Or Wn/Ws (for wage)

Question 16

Relative demand for labour depends on

B) Expression

C) rearrange to find us what useful result

Answer 16

Total production in that region

B)
Ln/Ls = (nN/nS) (Wn/Ws) to the -(1/1-a)

C) rearrange to find relative wage
Wn/Ws = (nN/nS) to the 1-a (Ln/Ls) to the -(1-a)

Question 17

What does relative wage depend on (2)

(We see why FC 21)

Answer 17

Rate of innovation (‘i’) = Δn = in
Rate of technology transfer (t) moves production from North to South (rich to poor area)
ΔnS = tnN

Question 18

So what is the change in number of goods produced in North ΔnN

Answer 18

ΔnN = in - tnN

number of goods available - change in goods produced in South

Question 19

What equilibrium do we arrive at

Answer 19

nN/nS = i/t

Ratio of new and old goods is constant (since production moves from North to South) , and depends on rates of innovation and tech transfer

Question 20

Effect of increase in i (innovation rate) on total goods, and wages

B) overall effect: which regions benefit

(hint: use equation)

Answer 20

More good available to all consumer (Δn = in)
Relative wages increase in the North (using equilibirum equation)

Overall effect positive for North and South (North as wages rise, but South benefit too… not sure why tho)

Question 21

Effect of an increase in t (rate of tech transfer)

B) which region benefits

Answer 21

No effect on number of goods. But more produced in South

Relative wages improve in South

B) Overall positive effect for South, ambigious for north

(Just use equation!!! nN/nS = i/t , if t increases nS needs to rise!

Question 22

What does Dollar do to rate of technology transfer (t)

Answer 22

Makes rate of tech transfer endogenouos - depends on relative production costs

I.e if South wages lower, tech transfer accelerates to take advantage of cost savings

Question 23

Impact of population growth in South

Answer 23

Increased labour supply in South means lower wages. Recall Dollar makes t depend on production cost differences. Now south even cheaper so Increased t so move capital

Thus reduces production in North and reduces demand for Northen labour Ln

Question 24

Grossman and Helpman - trade and growth (endogenous growth) theory
Labour can be used in North to produce (2)

B) r&d requires what else, and what does that grow at

Answer 24

Final goods, or as an input into R&D.

B) knowledge capital. Grows at the same rate as the number of goods in the world

Question 25

What determines at which rate the South can imitate goods produced in the North

Answer 25

The rate of tech transfer t

Question 26

If south can imitate North at a fast rate, what is North’s response?

B) what is the key result

Answer 26

Increase their rate of innovation! I.e more labour towards R&D

I.e if getting copied, innovate more

B) upward sloping relationship between growth rate and rate of tech transfer. (Since North pressured/incentivied to innovate more rapidly!)

hence why endogenous growth theory: growth is dependent on rate of tech transfer!

Question 27

Diagram for it

Answer 27

Y axis growth
X axis rate of tech transfer

North growth rate increases

South is steady