Learning Center
Plans & pricing Sign in
Sign Out



									International Economics
     S. Husted & M. Melvin

         Ch.10 International Trade
              and Economic Growth

                                                   Spring, 2008
                     School of International Trade & Economics
                                                  Inje University
                                          Prof. Park, Seok Keun
Other Types of Growth
  Pro-trade Biased Growth
  Anti-trade Biased Growth
Pro-trade Biased Growth
When growth occurs as a result of an increase in the
resource used intensively in the production of export
goods, then the output of export goods will rise
relative to import production, and international trade
will expand by more than the rate of growth of GDP.
This is called pro-trade biased growth (refer to
Figure 10.3 and Table 10.3).
Graphically, the PR line rotates away from
the CR line.
Anti-trade Biased Growth
  When growth occurs as a result of an
  increase in the resource used intensively in
  the production of import goods, then the
  output of import goods will rise relative to the
  output of export goods, and the international
  trade of this country will fall. This is anti-
  trade biased growth (refer to Table 10.4).
  Graphically, the PR line rotates toward the CR
  line indicating a tendency toward autarky.
Technological Change
  Technological (technical) change—
  occurs when the same amount of
  output can be produced with fewer
  factor inputs, or when the same amount
  of inputs can produce greater amounts
  of output.
Types of Technological Change
  Neutral technological change—an
  innovation that reduces by an equi-
  proportionate amount the quantity of factors
  required to produce a given level of output.
  Labor-saving (capital-saving)
  technological change—an innovation that
  leads to a reduction in the use of labor
  (capital) relative to other factors in the
  production of a given level of output.
Industry Effects of Technical Change
   If neutral technical progress occurs in
   one industry, the output of that industry
   will increase at the expense of the
   If technical progress allows an industry
   to save on the use of the factor it uses
   less intensively, then the output of that
   industry could rise or fall.
Economic Growth and
Terms of Trade for a Large Country
 With neutral economic growth, the terms of
 trade of the large country will tend to fall as
 the country grows.
 Pro-trade biased growth will cause the terms of
 trade to deteriorate more than under neutral
 Anti-trade biased growth will lead to an
 improvement in the terms of trade.
Immizerising Growth
  Immizerising Growth—growth that
  results in a reduction of the country’s
  welfare level.
  Refer to Figure 10.4 (next slide).
Is Immizerising Growth Common?
 No, because:
   Precise conditions on both the nature of
   growth and world demand must hold.
   Government policy (e.g., tariffs) can be
   used to counteract the negative effects
   of growth.
Dutch Disease
The phenomenon of a boom or good fortunes for one
part of a country’s economy eventually leading to very
bad times for the economy as a whole is known as the
Dutch disease.
An economic concept that tries to explain the
apparent relationship between the exploitation of
natural resources and a decline in the manufacturing
sector. The theory is that an increase in revenues
from natural resources will deindustrialise a nation’s
economy by raising the exchange rate, which makes
the manufacturing sector less competitive.
Refer to Item 10.1 The Dutch Disease
   The term “Dutch
Disease” originated
in the Netherlands
during the 1960s,
when the high
revenue generated
by its natural gas
discovery led to a
sharp decline in the
competitiveness of
its other, non-
booming tradable
International Flows of Factors
   Labor and migration
   Capital and multinational corporations
Labor Flows
  The U.S., Canada, Australia and
  other countries have experienced large
  inflows of migrants.
  Migration has resulted from government
  policies such as:
    Guest worker program (Europe) in which
    foreign workers are invited to temporarily
    relocate and work in a host country
Reasons for Migrating
  Better economic circumstances in
  another country.
  Refuge from political tyranny or
  Reunion with other family members.
Brain Drain vs. Brawn Drain
  Brain Drain—process whereby skilled
  workers leave their homeland and
  relocate abroad.
  Brawn Drain—the outflow of unskilled
  workers to other countries.
Brain Drain in Developing Country
Zimbabwe suffering in 'brawn drain‘
Zimbabweans have been leaving the country in large numbers in search of
better-paid jobs in the last couple of years, and no more so than in the
football world.
Economic Analysis of Factor Movements
 The case of labor migration
 Definition of terms:
   Marginal Product of Labor (MPL)
   Diminishing Returns to Labor
   Value of Marginal Product of Labor (VMPL)
 Profit-maximizing Rule
 Effects of immigration of foreign workers
Diminishing Returns
  Diminishing returns to labor—the
  fact that as more and more workers
  are added to the production process,
  holding all other factors constant,
  the marginal product of labor will
  eventually decline.
Marginal Product of Labor (MPL)

  MPL—the additional amount of
  output that can be produced with the
  addition of one more worker to the
  production process.
Value of
Marginal Product of Labor (VMPL)
   VMPL—the monetary value of the
   marginal product of labor or,
   alternatively, the marginal revenue
   to producers from hiring the last
   In equation form:

   where P is product price.
VMPL Curve and Equilibrium
Refer to Figure 10.5
VMPL curve is downward-sloping due to diminishing
returns and also represents the demand-for-labor
Given a fixed supply of workers, the interaction of
the demand and supply in the labor market
determines the wage rate.
The area under the VMPL curve represents labor
income and income paid to capital owners.
Effects of Foreign Labor Migration
  Wages are driven downward.
  Increase in labor force results in more
  output produced.
  There is an income redistribution effect:
  domestic labor loses income while
  capital owners benefit because the
  increased production leads to more
  intensive use of capital and to a rise in
  its rental prices.
U.S. Capital Flows
   In the 19th century, the U.S. was a
   capital-importing country.
   For much of the 20th century, the U.S.
   was a capital exporter.
   Since 1985, the U.S. has moved from
   being the world’s largest net creditor to
   being the world’s largest net borrower.
Direct Foreign Investment and MNC’s
   Direct Foreign Investment—
   happens when a domestic firm acquires
   ownership or control of the operations
   of a foreign firm.
   Multinational Corporations
   firms that own and operate capital in
   one or more foreign countries.
Features of U.S. MNCs
  Manufacturing accounts for the largest
  share of U.S. MNC employment (refer
  to Table 10.6 Employment of Nonbank
  U.S. MNCs).
  65% of U.S. MNC employment is in
  developed countries, primarily Western
  Europe (refer to Table 10.7).
What Special Advantages
do MNCs Have?
  MNCs may have access to special
  There may be increasing returns to
  scale that accrue to a firm operating
  plants in many locations.
  Outsourcing—the movement or
  shifting of production by a firm to a
  foreign location.
  See Item 10.2 for more details.
Ch.10 International Trade
  and Economic Growth

     Many Thanks!

To top