International Trade and Economic Development Flashcards
What are the 3 contributions of international trade to economic growth in developing countries?
i) vent-for-surplus theory of trade
ii) economies of scale
iii) historical experience
What is the vent-for-surplus theory of trade?
Market expansion with international trade utilizes the underutilized resources, leading to economic growth
What is the relation between developing countries and the export of primary products?
Developing countries’ export earnings mainly comes from primary products
Primary products export prices are volatile compared to manufactured goods due to low price elasticity of demand and supply
=> LDCs’ export earnings are unstable
What is the Prebisch-Singer hypothesis?
Terms of Trade: export price index/import price index
=> The long-run deterioration of the ToT of primary commodities export countries
Comes from the low income elasticity of demand for agricultural products
Relative price of manufactured goods rise, and relative price of agricultural products falls
Policy implications: support and spursue industrialization
What is the Policy debate?
Export promotion
Import substitution
What is export promotion?
Outward-oriented economic development policy to encourage free trade and FDI inflows
- Primary outward-oriented policy
- Secondary outward-oriented policy: better for long-run economic development
What is import substitution?
Inward-oriented policy to emphasize indigenous manufacturing and technologies
LDCs should initially develop domestic production of previously imported manufactured goods
Support by:
- the infant industry argument
- the Prebisch-Singer hypothesis
How are economies transitionning?
From centrally planned economies to market-based economies
What is the Endogenous Economic Growth theory?
In the Solow Growth Model, productivity is given
Endogenous Growth model: explain the determinants of productivity
What is the final equation of the Endogenous Growth Model?
Y’ = A’ + sA - d
How do you derive the final equation of the Endogenous Growth Model?
Y = AK and I = S
I = ▲K + d*K
S = sY
▲K + d*K = sY = sAK
Divide both side by K
▲K/K + d = sA
K’ + d = sA
Y’ = A’ + K’
Y’ = A’ + sA - d
What are the 4 implications of the equation of the Endogenous Growth Model?
Y’ = A’ + sA - d
i) Higher productivity growth and higher savings lead to higher economis growth rate
ii) education, international trade, and R&D expenditure increases A, so lead to growth
iii) As long as A’ + sA > d, persistent economic growth
iv) Government policies raising savings rate, education, and R&D contribute to economic growth
