Chapter 12
Trade Theory and
Development
Experience
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International Trade and Finance:
Some Key Issues
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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)
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12-2
Table 12.1
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Five Basic Questions about Trade
and Development
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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?
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12-4
The Importance of Trade for
Development
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LDC exports: trends and patterns
(see Table 12.2)
Importance of exports to developing nations
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12-5
Table 12.2
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12-6
The Importance of Trade for
Development
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LDC exports: trends and patterns
Importance of exports to different
developing nations
Demand elasticities and export earnings
instability
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12-7
The Terms of Trade and the
Prebisch-Singer Thesis
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Total export earnings depend on:
– Total volume of exports sold AND
– Price paid for exports
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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
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12-8
The Traditional Theory of
International Trade
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The principle of comparative advantage
Relative factor endowments and
international specialization: the Neoclassical
model
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12-9
Figure 12.1
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12-10
The Traditional Theory of
International Trade
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The principle of comparative advantage
Relative factor endowments and
international specialization: the Neoclassical
model
Trade theory and development: the
traditional arguments
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12-11
Some Criticisms of Traditional Free-Trade
Theory in the Context of DevelopingCountry Experience
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Six assumptions of the Neoclassical model
must be scrutinized:
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12-12
The Six Assumptions
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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
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12-13
The Six Assumptions (cont’d)
– Balanced trade and international price
adjustments
– Trade gains accruing to nationals
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Figure 12.2
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Some Conclusions on Trade Theory
and Economic Development Strategy
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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
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Figure 12.3
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12-17
Concepts for Review
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Absolute advantage
Balanced trade
Barter transactions
Capital account
Collective self-reliance
Collusion
Commodity terms of
trade
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Comparative
advantage
Current account
Enclave economies
Export dependence
Export earnings
instability
Factor endowment
trade theory
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Concepts for Review (cont’d)
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Factor mobility
Factor-price
equalization
Foreign-exchange
earnings
Free trade
Gains from trade
Globalization
Growth poles
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Income elasticity of
demand
Income terms of trade
Increasing returns
Industrial policy
Monopolistic market
control
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Concepts for Review (cont’d)
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North-south trade
models
Oligopolistic market
control
Prebisch-Singer thesis
Price elasticity of
demand
Primary products
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Product cycle
Product differentiation
Quotas
Regional trading
blocks
Returns to scale
Risk
Specialization
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Concepts for Review (cont’d)
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Subsidies
Synthetic substitutes
Tariffs
Trade deficits
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Uncertainty
Vent-for-surplus theory
of international trade
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