Ch7_Growth&Trade

Ch7_Growth&Trade - GROWTH AND TRADE 1 Overview •...

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Unformatted text preview: GROWTH AND TRADE 1 Overview • How does growth affect welfare and economic performance? • Economies grow (or shrink) everywhere • Three kinds of growth Balanced factor endowment grows All the factors grow at about the same rate Unbalanced factor endowment grows One factor grows (or grows faster); other don’t Productivity increases 6 Overview Questions • • • • Is growth always good? What is the Rybczynski Theorem? What is the “Dutch Disease”? Under what circumstances is immiserizing growth more likely to occur? You grow but become poorer as a result (Samuelson) • Can opening to economic growth? trade deliver continuous 7 •1 A Digression on Growth • As factor endowments increase, Labor through population growth or other Capital, through net capital investment the economy will “grow” in that GDP will grow • If there are technological innovations, then GDP per capita also grows That is what many consider “growth” • Opening to trade can deliver higher per capita GDP growth temporarily • But NOT permanently higher growth 8 Growth and Trade • Over time, factor endowments change and/or technologies improve • In the models it shows up as a shift in the production possibility frontier • This shift affects production, prices, trade, and welfare 9 Growth and Trade (cnt.) • Trade can inspire growth for a long time: Specialization due to trade Necessary economic and institutional reforms that are put in place Weaning of monopolies and their gross inefficiencies Imports of current technology & know-how Capital imports, particularly FDI • But once world-class efficiency is achieved, any further per capita growth must come from technology 10 •2 Growth and Trade (cnt.) cnt.) • There are several cases to be studied Balanced growth vs Unbalanced growth Large vs Small economy • Factor endowment growth means more output, so overall it is a good thing The distribution of income may change some There may not be per capita growth 11 Growth and Trade (concl.) concl.) • Growth can create possible difficulties only for large economies large A large economy may produce significantly more output This may change world relative prices • When prices change, relative gains and losses change You have to analyze the situation more carefully • Relative prices are also called Terms of Trade (ToT) The price of the import relative to the export 12 The Rybczynski Theorem • Let only one (of the 2) factor endowment increase; “unbalanced growth” • The industry that uses that factor intensively will grow, the other industry will decline It means that some of the “other” factor will move to the growing industry 13 •3 The Rybczynski Theorem (cnt) cnt) • If agriculture is capital intensive and capital increases Agriculture will expand The other industry will shrink Some workers from the other industry will move to agriculture 14 The Rybczynski Theorem (cnt.) cnt.) • Why does it work that way? When only capital increases, it is natural that it is going to be employed in the capitalintensive sector (agriculture) But more capital in agriculture also means additional labor, which hasn’t increased Labor that used to be in the other industry moves to agriculture The other industry shrinks 15 Rybczynski Theorem (concl) concl) • “Dutch Disease” The deindustrialization of an economy as a result of the discovery of a natural resource. So named because it occurred in Holland after the discovery of North Sea gas; it has also been applied to the UK since the discovery of North Sea oil. The discovery of such a resource lifts the value of the country's currency, making manufactured goods less competitive; exports therefore decline and imports rise. Dictionary of Business, Oxford University Press 16 •4 More On the Dutch Disease • Rybczynsky Theorem: an expansion of the extraction industry must diminish activity in the other industries • This feels like a decline of the other industries or “deindustrialization” • It also shows up as an appreciation in the FX rate Important but not related to trade theory 17 Balanced Growth • Balanced growth means the frontier expands out Frontier’s slope doesn’t change All Balanced Growth W factors may grow together or it may be a neutral productivity increase C 18 Balanced Growth (concl) concl) • Small economy Country is always better off This because the increase in output doesn’t change ToT doesn’ • Large economy Country generally better off ToT may be affected, possibly adversely 19 •5 Unbalanced Growth • Rybczynsky’s theorem is the extreme case Only one factor grows • Small economy Country is always better off This because the increase in output doesn’t change ToT doesn’ • Large economy There are issues 20 Unbalanced Growth (cnt) cnt) • Large economy Growth biased towards the import sector: Better off Better W More production of imported goods makes them cheaper; imports may be reduced C 21 Unbalanced Growth (cnt) cnt) • Large economy Growth biased towards the import sector: Better off Better W More production of imported goods makes them cheaper; imports may be reduced C 22 •6 Unbalanced Growth (cnt) cnt) • Large economy Growth biased towards the import sector: Better off Better W More production of imported goods makes them cheaper; imports may be reduced C 23 Unbalanced Growth (cnt) cnt) • Large economy Growth biased towards the export sector: Possibility of immiserizing growth W C 24 Immiserizing Growth • Two effects when a large economy grows Growth effect => tends to make economy better off ToT effect if growth biased toward the import sector =>ToT improves if growth biased toward to export sector => ToT worsens If ToT worsens enough to overcome the growth effects => growth is immiserizing 25 •7 Immiserizing Growth (cnt) cnt) • Conditions under which growth causes to ToT worsen enough to cause immiserizing growth: has to be a large economy large growth strongly biased toward the export sector world demand for the export good is very inelastic Implies large price drop when supply increases the economy is heavily dependent on the export sector (heavily involved in trade) before growth 26 Immiserizing Growth (concl) concl) • This possibility is almost universally ignored in practice Samuelson’s Jane and John Doe economists! It is treated as a theoretical curiosity • Japan, the “tigers”, and many others grow by increasing exports Their policies are aimed at promoting exports • The don’t behave as if they worry about immiserizing growth! 27 Key Summary Points • The Rybczynsky theorem says that if only one factor endowment (of two) grows The industry that uses that factor expands, the other industry contracts • A small economy always benefits from growth It can’t change relative prices (ToT) • A large economy always benefits from growth if growth favors its import sector Reduces the price of the import • A large economy may be harmed by growth, if growth favors its export sector Reduces the price of the export 31 •8 THE END 32 •9 ...
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