Chapter 12 Trade Theory and Development Experience Copyright

Chapter 12 Trade Theory and Development Experience Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

International Trade and Finance: Some Key Issues n n Many LDCs rely heavily on exports (usually primary products) Many LDCs also rely heavily on imports (typically of machinery, capital goods, intermediate producer goods, and consumer products) Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 2

Table 12. 1 Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 3

Five Basic Questions about Trade and Development n n n How does international trade affect economic growth? How does trade alter the distribution of income? How can trade promote development? Can LDCs determine how much they trade? Is an outward-looking or an inward-looking trade policy best? Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4

The Importance of Trade for Development n n LDC exports: trends and patterns (see Table 12. 2) Importance of exports to developing nations Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5

Table 12. 2 Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 6

The Importance of Trade for Development n n n LDC exports: trends and patterns Importance of exports to different developing nations Demand elasticities and export earnings instability Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7

The Terms of Trade and the Prebisch-Singer Thesis n Total export earnings depend on: – Total volume of exports sold AND – Price paid for exports n n Prebisch and Singer argue that export prices fall over time, so LDCs lose revenue unless they can continually increase export volumes Prebisch and Singer think LDCs need to avoid a dependence on primary exports Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 8

The Traditional Theory of International Trade n n The principle of comparative advantage Relative factor endowments and international specialization: the Neoclassical model Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 9

Figure 12. 1 Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 10

The Traditional Theory of International Trade n n n The principle of comparative advantage Relative factor endowments and international specialization: the Neoclassical model Trade theory and development: the traditional arguments Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 11

Some Criticisms of Traditional Free-Trade Theory in the Context of Developing. Country Experience n Six assumptions of the Neoclassical model must be scrutinized: Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 12

The Six Assumptions n The following assumptions of the Neoclassical model must be scrutinized: – Fixed resources, full employment, and international factor immobility – Fixed, freely available technology and consumer sovereignty – Internal factor mobility and perfect competition – Governmental non-interference in trade Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 13

The Six Assumptions (cont’d) – Balanced trade and international price adjustments – Trade gains accruing to nationals Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 14

Figure 12. 2 Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15

Some Conclusions on Trade Theory and Economic Development Strategy n n n Trade can lead to rapid economic growth under some circumstances Trade seems to reinforce existing income inequalities Trade can benefit LDCs if they can extract trade concessions from developed countries LDCs generally must trade Regional cooperation may help LDCs Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16

Figure 12. 3 Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 17

Concepts for Review n n n n Absolute advantage Balanced trade Barter transactions Capital account Collective self-reliance Collusion Commodity terms of trade Copyright © 2006 Pearson Addison-Wesley. All rights reserved. n n n Comparative advantage Current account Enclave economies Export dependence Export earnings instability Factor endowment trade theory 18

Concepts for Review (cont’d) n n n n Factor mobility Factor-price equalization Foreign-exchange earnings Free trade Gains from trade Globalization Growth poles Copyright © 2006 Pearson Addison-Wesley. All rights reserved. n n n Income elasticity of demand Income terms of trade Increasing returns Industrial policy Monopolistic market control 19

Concepts for Review (cont’d) n n n North-south trade models Oligopolistic market control Prebisch-Singer thesis Price elasticity of demand Primary products Copyright © 2006 Pearson Addison-Wesley. All rights reserved. n n n n Product cycle Product differentiation Quotas Regional trading blocks Returns to scale Risk Specialization 20

Concepts for Review (cont’d) n n Subsidies Synthetic substitutes Tariffs Trade deficits Copyright © 2006 Pearson Addison-Wesley. All rights reserved. n n Uncertainty Vent-for-surplus theory of international trade 21