7: Trade Technology And Growth (Static vs Dynamic, Tech Gap theory, Product cycle theory, endogenous growth theory) Flashcards
4 topics within this
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)
What are the static gains from trade (2)
B) what do static gains result in?
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
Dynamic gains from trade (7)
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
Persistent shocks to terms of trade: if improvement in TOT persists, what happens to country welfare
Continuously improves
Negative example of persistent shocks to ToT
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
- Market expansion and deeper specialisation: how does trade allow this
Trade opens up larger markets, allowing for EOS and deeper specialisation, increase specialisation improves productivity
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
The recipient’s existing human capital (to be able to use the new advanced tech)
Trade stimulates product/process innovation (encourages firms to innovate)
What is this key for (2)
Key for successful market entry and securing market position
Trade creates pro-competitive effects (2)
Trade reduces market power for monopolies by foreign competition.
Trade increases returns to R&D (since larger market to access + more knowledge learning)
2nd topic:
Technology gap theory (Posner)
Difference in rate of tech growth/innovation is a cause of trade
Demand vs imitation gap
B) how does this explain why trade occurs
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)
3rd topic:
Product cycle model: 3 stages
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
Product cycle model diagram
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
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)
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
Demand for new goods relative to old goods depends on what?
B) expression
Depends on relative prices! which means also wages
Qn/Qs = Pn/Ps to the -(1/1-α)
Or Wn/Ws (for wage)
Relative demand for labour depends on
B) Expression
C) rearrange to find us what useful result
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)
What does relative wage depend on (2)
(We see why FC 21)
Rate of innovation (‘i’) = Δn = in
Rate of technology transfer (t) moves production from North to South (rich to poor area)
ΔnS = tnN
So what is the change in number of goods produced in North ΔnN
ΔnN = in - tnN
number of goods available - change in goods produced in South
What equilibrium do we arrive at
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
Effect of increase in i (innovation rate) on total goods, and wages
B) overall effect: which regions benefit
(hint: use equation)
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)
Effect of an increase in t (rate of tech transfer)
B) which region benefits
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!
What does Dollar do to rate of technology transfer (t)
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
Impact of population growth in South
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
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
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
What determines at which rate the South can imitate goods produced in the North
The rate of tech transfer t
If south can imitate North at a fast rate, what is North’s response?
B) what is the key result
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!
Diagram for it
Y axis growth
X axis rate of tech transfer
North growth rate increases
South is steady
