Growth & International Trade

Dr. Kavita Srivastava

IILM-CMS
Greater Noida
 Effect of Economic Conditions Abroad
on
Growth


Growth in foreign economies can be expected


to be good for the domestic economy :

o Increase in demand for exports of home
country
o Opposing view is that it increases
competition for country’s exports abroad.

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 Recession abroad
Adverse Effects:
Results in the fall in demand for the nation’s
exports
Increased competition for the exports
Favorable Effects:

Imports might become cheaper for the

country concerned.

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 Effect of domestic growth on
domestic economy vis-à-vis trade

Favorable impact on exports as exportable
surplus increases
Adverse impact as demand for imports
might also increase.

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 Growth & Production Frontier
 Upward shift of production frontier
 Either by increase in resources or technical
factors which increase factor productivity
 Growth can be balanced or biased
 Balanced Growth results in even shift & slope of
the production frontier
 Biased growth results in uneven shift and the
slope of the production frontier.
 If bias in growth is in favour of goods that the
country exports, it is export –biased growth
and if the growth is biased towards the goods
it imports it is import baised growth.
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Shifts in the Production Possibility
Curve
Society can produce more output if:
Technology is improved.
More resources are discovered.
Economic institutions get better at fulfilling
our wants.
Shifts in the Production Possibility
Curve

Neutral Technological Change

sdoog evisnetnI latipaC

C
A

0 B D
Labour Intensive Goods
Shifts in the Production Possibility
Curve

Biased Technological Change

C
sdoog evisnetnI latipaC

0
A
Labour Intensive
Goods
Examples of Shifts in the
Production Possibility Curve


 Test your understanding:

 A meteor hits the world and destroys half the
earth’s natural resources.
 Nanotechnology is perfected that lowers the
cost of manufactured goods.
Examples of Shifts in the
Production Possibility Curve


 Test your understanding:

lA new technology is discovered that

doubles the speed at which all goods
can be produced.
lGlobal warming increases the cost of
producing agricultural goods.
 Effect of Growth on Trade

Effect of Growth on Terms of Trade
Effect of Growth on volume of trade

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 Effect of Growth on Terms of
Trade

TOT may be affected by the shift in relative
supply resulting from growth
Effect depends on relative supply(RS) and
relative demand (RD)curve


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 Export Biased Growth
 Home country experiences growth in favour of X, the
commodity it exports
 RS shifts to the right as RS1
 Price of exportable falls
 Deterioration in terms of trade
 Export biased growth tends to worsen TOT of a country to
benefit the ROW
RS

 RS1


RD

Export Biased Growth

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 Import Biased Growth
 Shift in relative supply curve of the exportable X to
the left
 Improvement in the terms of trade of home country
 Worsening of terms of trade of the foreign countries
exporting that good
 Import biased growth tends to improve TOT of the
country at the expense ofRS1the rest of the world



RS

RD

Import Biased Growth

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 Secular Deterioration of TOT
According to secular deterioration


hypothesis :
Developing countries basically export
primary commodities
Primary products exports of developing
countries face an unfavorable demand
conditions in the international market as
their demand is inelastic
Further there is a threat of substitution by
synthetic products
Export biased growth in such countries
results in an increase in their relative
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supply
 Immiserising Growth
Hypothesis


According to immiserising growth hypothesis:



Growth in poor economies could be self-

defeating because the export biased
growth would worsen their TOT so much
that they would be worse off than if they
had not grown at all.


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 Policy Implications

To maintain a favorable TOT, it is essential to
manage relative supply
Cartel and OPEC regulated the oil supply and
hiked the price in the 1970’s


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 Effect of Growth on Trade
Volume
ECONOMIC GROWTH CAN BE PRO-TRADE,
ANTI TRADE OR NEUTRAL
Effect of growth on trade volume depends on:

Rate at which the output of the nation’s

tradable commodities grows
Consumption pattern of the nation as its
national income expands through growth &
trade

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 Trade volume can be affected
by :
Changes in production:


Growth in production can be regarded as pro

trade if it leads to a more than
proportionate increase in trade
When the output of a nation’s exportable
commodity grows proportionately more
than the output of its importable
commodity at constant prices GROWTH IS
PRO TRADE


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 Effect of economic growth on foreign trade


will depend on:

How producers will allocate the resources for
production? and how consumers will spend
additional real income?
In other words it depends on the behavior of
producers and consumers

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 

 Continued…..

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