Chapter 6 Economic Growth
and
International Trade
制作人：刘继森教授
6.1 The connotation of economic growth
In addition to the technological gap and product based on
the trade life cycle is dynamic. All of those trade theory
discussed so far are static. In other words, given a
country's factor endowment, technology, preferences,
we can determine the country's comparative advantage
and gains from trade.
However, the factor endowment changes over
time, technology also often improved, references
can be changed. Therefore, a country's
comparative advantage will change over time.
Economic growth: the change that a country's per capita
real GDP from one phase to another.
Economic growth is usually expressed with economic
growth rate.
The increase in GDP can be obtained through a variety
of ways, such as increasing factors of production inputs,
such as labor (L), capital (K), with additional input,
output will grow.
Through technological progress, we can increase the L,
K to improve the efficiency of output levels.
Source of economic growth: the growth of factor inputs,
scientific and technological progress.
Well-known Cobb - Douglas production function:
X=AKαL1-α
Economic growth can affects the international
trade from the supply and demand-side aspects .
Here let us look at the demand side effects.
6.2 Changes in demand on international
trade
 Changes in demand for people's
lives and income change has a
great relationship. Adequate food
and clothing and well-off is
measured in terms of income levels.
 Before we come into contact with
the Engel's law, this section has
emerged a new concept related to
this, that Engel effects. Engel's law
is expressed in ηi, but Engel effect
is expressed in ηi-1.
 As income increases, a consumer
demand is increasing, ηi> 1, ηi-1 is
positive, that is, Engel's effect is
positive.
 Several other cases left to our own
derivation. Obviously, Engel's Law
refers to the food Engel effect is
negative.
 Although the Engle had studied the
food , but if we put this issue
extended to the entire international
trade of primary products, particularly
agricultural products, we will find that
significance of Engel effects .
 U.S. economist Kindleberger and Lewis
made a empirical study, then give a
conclude:
 the exporting country's terms of trade of
primary products (agricultural and mineral)
gradually deteriorated along the economic
growth because as people's income is
increased, the demand shifts in preferences,
greater demand for industrial products, so
the prices of primary products decline in
demand due to falling prices, and now has
to import the same amount of
manufactured goods to be exported
primary products, the number is growing.
 Thus, developing countries exports of
primary products are always more
and more clear that is not conducive
to improved terms of trade and in
international trade patterns in the
advancement.
This is why developing countries to
try to do everything possible to
complete the industrialization .
6.3 The growth of production factor on
international trade
 Last section, we discuss the economic
growth on international trade from
the perspective of the changing needs.
This section we will discuss the
economic growth on international
trade from the perspective of supply
 The factors that affect the Changes of
supply of terms are the growth 0f
production factor and technological
progress.
Let us be analyzed separately.
6.3.1The growth of factors of production
 Typically, a country's population and
the number of labor force (L) will
grow over time. Similarly, through the
use of some resources to productive
capital (K) device, a country's capital
stock will increase.
 Capital refers to all means of
production made by people, such as
machinery, factories, office buildings,
transport and communication tools,
including workforce education and
training, all of which greatly increase
a country's ability to produce goods
and services.
Y
140
B’
70
B
0
140
280
X
6.3.2 factors of production growth in the
case of neutral
 If the growth rate of labor and capital
is the same , production possibilities
curve will be two elements of the
growth rate of emigration in both
directions simultaneously. The results
of the old and new two curves
(growth factor before and after) the
slope of the same points.
6.3.3The case of factors of production
growth in the production of imported
goods
 If the factors of production growth is not at
the same time by the same percentage
change, the situation is more complex than
the first number. It depends on the
elements of this change belongs to which
country, which used to produce what kind
of product, is used to produce import
substitution goods, or is used to produce
export goods?
 Situation is different, the impact on
international trade are also different.
 Assume that the growth of factors of
production is used to produce import
substitution goods.
 If the United States produce wheat, and
textiles. Relative of wheat, the textiles and
apparel products are capital-intensive.
 Now assume that the number of U.S.
capital increase, while production of factors
of production of wheat has not grown.
 Capital growth, due to the increase in
capital supply, so the price of capital
that the interest rate will be reduced.
Because of this element of capital
cheaper than the original, will lead to
more companies using capital,
therefore, the U.S. textile relative to
wheat is to increase, imports will be
reduced.
 Conclusion: The substitution of
imported goods used in the
production of growth factors of
production would lead to reduction in
the number of imports.
生产要素增长前：
小麦
生产点B（20纺织品，80小麦）
消费点C（60纺织品，40小麦）
小麦出口40
A’
纺织品进口40
A
生产要素增长后：
80
75
B
生产点B’（55纺织品，75小麦）
B’
消费点C‘（75纺织品，55小麦）
小麦出口20
C’
55
纺织品进口20
C
40
结论：小麦相对价格上升
纺织品相对价格下降
1/1
D
0
20
55 60
1/1
75
80
D’
纺织品
6.3.4 The case of factors of
production growth in the production
of exported goods
 Analysis on this point is precisely
reversed to the previous point .We
here only give conclusions.
 See textbook P109:
Before growth factors of production :
Production point B (80 wheat, 20
textile)
Consumption point C (40 wheat, 60
textile)
Wheat exports 40
Textiles imports 40
 After factors of production growth:
Production point B '(110 wheat, 15
textile)
Consumption point C '(50 wheat, 75
textile)
Wheat exports 60
textiles imports 60
 Conclusion: Expanding the scale of
world trade, if the country's share of
world trade is large , it will lead
textiles prices rose , wheat prices fell.
The same rules have effect subject to
the supply, only the domestic market
replaced by the international market.
 From this we lead to an important
theorem, which Rybczyski Theorem.
6.3.5 Rybczyski Theorem
 Suppose a country produces only two
products, under the premise of fixed
prices , a growth of production factor
will lead to production of sector
intensively use of factors increased
and production of other intensively
use of factors declined.
E’
K
X’
K’
E
X
Y
Y‘
0
2016/3/23
L’
26
 Important conclusions:
 The growth of production factors that
can produce imports would reduce
the demand for imported goods,
thereby improving their terms of
trade;
 The growth of production factors that
can produce exports would increase
the supply of exports, leading to
worsening terms of trade.
 This point is particularly important to
the export-oriented enterprises . As
exports increasing , it must also
concerned about the possible
negative effects of terms of trade, to
avoid disadvantages.
6.3.6 Immiserizing growth and
Dutch disease
 In general, economic growth is a good
thing, but there are special
circumstances, which when unbalanced
economic growth, economic growth
could adversely affect a country's
economy.
 Therefore, we should pay attention to
distinguish between economic growth
and economic development, the
concepts mentioned here are the
strange phenomenon caused by growth
of economic imbalances .
 Dutch disease: the growth and the
expansion of one industry led to
contraction of other industries. From
the Netherlands, hence the name.
Other countries occurred the same
phenomenon.
 Immiserizing growth also be called
Bhagwati effect. The increase of
export capacity may have adverse
effects on terms of trade and the
domestic economy.
 the main reasons of Bhagwati effect :
the deterioration of terms of trade.
 After the economic growth ,if the
decline of a social welfare benefits
caused by worsening terms of trade is
more than that caused by economic
growth , poverty growth can occur.
（manufactured goods）
Y
c
Y’
c’
U’
A’
U
b’
g’
A
g
Y
T’
b
T
0
X’
B
B’
X
（coffee）
 Before growth :
Exports of coffee gb, imports
manufactured goods cg
Terms of trade: cg / gb
After growth:
Exports of coffee g'b ', imported
manufactured goods c'g'
Terms of trade: c'g '/ g'b'
 Since: c'g '/ g'b' <cg / gb
Conclusion: The worsening terms of
trade, poverty growth appears
 comparing the indifference curve, the
more near from the origin, the
smaller utility.
 The more coffee exports, the more
overall consumer and social welfare
decline , this is the growth of poverty.
 Poverty growth assumptions:
 First, the country's merchandise
exports in the world account for a
large share of the market;
 Second, productivity growth in the
country concentrated in the export
production sector;
 Third, the international market
elasticity of demand for such
commodities lower.
Section IV technological
progress on international
trade
 1. the meaning and types of
technological progress
 Technological progress on
international trade theory we have
learned are: technological gap theory
and the product life cycle theory.
 Here to discuss the growth of the
production capacity brought by
technological innovations how to
affect international trade
 Hicks on the classification of
technological progress:
 Neutral technological progress: labor
and capital productivity increased in
the same proportion ,if the relative
price (wage rates / interest rates)
unchanged, the ratio that produced
the same amount of goods needed for
the capital and labor decreased, K / L
constant.
 Labor-saving technological progress:
the improvement of capital
productivity is faster than labor
productivity. Based on the relative
price (wage rate / interest rate)
unchanged, part of the labor force in
production was replaced by capital, K
/ L increased.
 Factors of production decreased, but
not so reduced proportionally. Some
use less labor, with relatively more
capital, or, for every unit of labor is
now using more capital. This is the
meaning of saving labor.
 Capital-saving technological progress:
the improvement of labor productivity
is greater than capital productivity.
Based on the relative price (wage rate
/ interest rate) unchanged, part of
the capital in production was replaced
by labor, K / L be reduced.
 Factors of production decreased, but
not so reduced proportionally. Some
use less capital and labor with
relatively more, or, to use more
capital per unit of labor, this is the
meaning of saving the capital.
Technical progress impact on the
production possibilities curve:
Y
A3
A2
A1
A0
0
X
B0
B3
B2
B1
2. Technological progress and
international trade
 Technological progress affected the
structure of products in international
trade and trade patterns.
 Trade exporters are basically
developed and newly industrialized
countries, while the primary product
producing countries in international
trade is increasingly unfavorable
position
 The impact of technological progress
on international trade depends on
what factors of production have
changed caused by technological
progress.
 (1) The impact of neutral technical
progress on international trade
 Technological progress in labor-intensive
industries:
 Products increased.
 Produced the imported products, while
imports decreased.
 Technological progress in capital-intensive
industries :
 Products increased.
Produced the export products, while the
exports increased; produced imports, while
imports decreased.
 (2) the impact of labor-saving
technological progress on
international trade
 Technological progress in laborintensive industries:
 The same results with neutral
technical progress
 Technological progress in capital-intensive
industries:
 * The degree of capital-intensity and labor
saving is also higher : the industry's output
will not be much growth and import and
export volume would not be a big change.
 * The degree of capital-intensity and labor
saving is not higher: the industry will have
greater output growth, changes in import
and export volume will be greater.
 (3) the impact of capital-saving
technological progress on
international trade
 Technological progress in capitalintensive industries: the same as with
neutral technical progress.
 Technological advances in laborintensive industries: the impact must
be decided according to labor
intensity and the extent of capital
savings.