8&9 - International Trade Theory And Development Strategy Flashcards
What do developing countries rely heavily on
Exports of primary products (of machinery, capital goods, inter,educate producer goods, consumer necessities)
Since the 1990s what are developing countries promoting
Exports and accumulate large foreign exchange reserves to cushion against crisis
Demand elasticities amd Export earning instability
- Low-price elasticity of Demand for agricultural commodities but supply shocks
- Low-price elasticity of supply for basic commodities but demand shocks
- Results can be export earnings instability; risks to income
What do Total exports earnings depend on
- Total volume of exports sold
- Price paid for exports
What does Prebisch and Singer argue
Commodity export prices fall over time, so developing countries lose revenue unless they can continually increase export volumes
- They concludes that developing countries need to avoid dependence on primary exports
How do countries get comparative advantage
Specialisation
International specialisation: The neoclassical model
- Ricardo and Mill (static model)
- Heckscher and Ohlin (factor endowment theory)
Countries have different endowments of actors of production
Different products require productive factors in different ratios
Graph to show
Main conclusion of the neoclassical model
- All countries gain from trade
- World output increase from trade
- Countries will tend to specialise in products that use their abundant resources intensively
- International wage rates and capital costs will gradually tend toward equalisation
- Returns to owners of abundant resources will rise relatively
- Trade will stimulate economic growth
Trade theory and development: Other traditional arguments
- Trade stimulates economic growth
- Trade promotes international and domestic equality
- Trade promotes and rewards sectors of comparative advantage
- International prices and costs of production determine trading volumes
- Outward-looking International policy is superior to isolation
Critique of Traditional free-trade theory in context of developing countries experience
Following assumptions of the basic neoclassical model have been scrutinised:
- Fixed Resources, full employment, international factor immobility
- Fixed, freely available technology and consumer sovereignty vs product cycle, ongoing development of synthetic substitutes for developing countries exports, opportunities for gains in leading sectors
- Governmental non-interference In trade vs active trade policies
Porters “competitive advantage” theory:
- Traditional trade theory applies to basic factors (unskilled labour, physical resources)
- But creating of advanced factors (knowledge resources, specialised infrastructure) is the priority
- Unemployment
- Resource underutilisation
- Vent for surplus theory (graph for this)
- Absence of national governments in trading relations
Looking outward and seeing trade barriers
- Primary commodity export expansion, limited demand
- Low Income elasticities
- Low population growth rates in developed economies
- Decline In prices implies low revenues
- Lack of success with international commodity agreements
- Agricultural subsidies
Primary commodity export expansion, supply rigidities
- Limited Resources, Poor climate, bad soils, outdated rural institutional, social and economic structures
Export promotion and import substitution
- Expanding exports of manufactured goods: Greater successes, particularly China; unevenly distributed across the developing world (protection by developed countries - Multifiber arrangement)
- Import substitution: Looking inward but still paying outward. (Tariffs, infant industries, and the theory of protection) (graphs to show)
The import substitution (IS) industrialisation strategy and results
- Protected industries get inefficient and costly
- Foreign firms often benefit more
- Subsidisation of imports of capital goods tilts pattern of industrialisation and contributes to balance of payments (BOP) problems
- Overvalued exchange rates hurts exports
Nominal tariff rate , t , is
t = p’ - p / p
P’ = tariff inclusive price
P = free trade price
Effective tariff rate is
P = v’ - v / v
V’ = value added per unit of output, inclusive of the tariff
V = value added per unit of output under free trade
