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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 other. 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 growth. 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 sector. 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 devastation. 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 worker. 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 curve. 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 (MNCs)— 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 technology. There may be increasing returns to scale that accrue to a firm operating plants in many locations. Outsourcing 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!
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