International Economics
Li Yumei
Economics & Management School
of Southwest University
International Economics
Chapter 11
International Trade and
Economic Development
Organization








11.1 Introduction
11.2 The Importance of Trade to
Development
11.3 The Terms of Trade and Economic
Development
11.4 Export Instability and Economic
Development
11.5 Import Substitution versus Export
Orientation
11.6 Current Problems Facing Developing
Countries
Chapter Summary
Exercises
11.1 Introduction

This chapter examine the special trade problems
faced by developing countries

Labor-intensive goods
Terms of trade
Import substitution and Export-orientation






The international trade can contribute
significantly to the development of poor nations
The importance of trade to development can give
rise to some special problems requiring joint
action by both developed and developing
nations
Disparities between developed and developing countries
Trade disputes between developed and developing
countries
11.2 The Importance of Trade to
Development





Trade Theory and Economic
Development
Trade as an Engine of Growth
The Contributions of Trade to
Development
International Trade and Endogenous
Growth Theory(内生性增长理论)
Conclusion
 Trade Theory and Economic
Development

Developed Countries and Developing Countries

Developed countries are characterized in general by high
average real per capita income, a low proportion of the
labor force in agriculture , high life expectancies, low rates
of illiteracy, low rates of population growth, and high rates
of growth in average real per capita income
Developing countries is the opposite characteristics of
developed countries


Traditional Trade Theory
Traditional trade theory postulates that if each nation
specializes in the production of the commodity of its
comparative advantage, world output will be greater and ,
through trade, each nation will share in the gains
 Trade Theory and Economic
Development

Trade Theory and Developing Countries

According to the trade theory, developing countries
should focus on the production of primary goods and
export of raw materials, fuels, minerals and food to
developed nations in exchange for manufactured products
Developing countries attack traditional trade theory as
static and irrelevant to the development progress (except
in short run)
One nation’s pattern of development is not determined once
and for all, but must be recomputed as underlying conditions
change or are expected to change over time
The dynamic benefits from industry can theoretically be
incorporated into the original calculations of comparative
advantage and into subsequent changes in comparative
advantage over time

1.
2.
 Trade as an Engine of Growth

Figure 1
 The Contributions of Trade to
Development




To the full utilization of underemployed domestic
resources (from inefficient production to
inefficient production)
By expanding the size of the market, trade makes
possible division of labor and economies of
scale
Trade is the vehicle for the transmission of new
ideas, new technology and new managerial and
other skills
Trade stimulates and facilitates the international
flow of capital from developed to developing
nations
 The Contributions of Trade to
Development


For several large developing countries (Brazil,
India and China), the importation of new
manufactured products has stimulated domestic
demand until efficient domestic production of
these goods become feasible
International trade is an excellent antimonopoly
weapon due to the greater efficiency by domestic
production to meet the foreign producers
( especially keeping the low cost and price of intermediate
or semi-finished products used as inputs in the domestic
production of other commodities)
 International Trade and Endogenous
Growth Theory

Endogenous Growth Theory
Romer (1986) and Lucas(1988) provide a more convincing
and rigorous theoretical basis for the positive relationship
between international trade and long-run economic growth
and development

Theory postulates that lowering trade barriers will speed up
the rate of economic growth and development in the long
run by
1. Allowing developing nations to absorb the technology developed in
advanced nations at a faster rate than with a lower degree of
openness

 International Trade and Endogenous
Growth Theory
2. Increasing the benefits that flow from research and development
3. Promoting larger economies of scale in production
4. Reducing price distortions and leading to a more efficient use of
domestic resources across sectors
5. Encouraging greater specialization and more efficiency in the
production of intermediate inputs
6. Leading to the more rapid introduction of new products and
services
Case Study 11-1 page 362
See the following tables
 Conclusion
Although the level and the rate of economic
development depend primarily on internal conditions
in developing nations, international trade can
contribute significantly to the development process.
Some economists believed that international trade
and the functioning of the present international
economic system benefited developed nations at the
expense of developing nations
11.3 The Terms of Trade and
Economic Development




The Various Terms of Trade
Alleged Reasons for Deterioration in the
Commodity Terms of Trade
Historical Movement in the Commodity
and Income Terms of Trade
Conclusion
 The Various Terms of Trade

Types of Terms of Trade


Commodity or net barter terms of trade(净贸易条件)
Income terms of trade(收入贸易条件)
Single factor terms of trade(单因素贸易条件)
Double factor terms of trade(双因素贸易条件)

Commodity or net barter terms of trade


It is the ratio of the price index of the nation’s exports (PX) to
the price index of its imports (PM) multiplied by 100
N=(PX/ PM) 100

Income terms of trade
I =(PX/ PM) QX (QX the index of the volume of exports)
 The Various Terms of Trade

Single factor terms of trade
S=(PX/ PM) ZX
ZX the productivity index in the nation’s export sector

Double factor terms of trade
D=(PX/ PM) (ZX/ ZM)
ZX the productivity index in the nation’s export sector;
ZM the productivity index in the nation’s import sector

Evaluation of the Types of terms of trade

N, I and S are the most important. D does not have much
significance for developing nations and is very seldom
N is the easiest to measure
Developing nations tend to deteriorate the terms of trade
in over time


 Alleged Reasons for Deterioration in
the Commodity Terms of Trade

Productivity increases are reflected in lower
prices in developing nations while higher wages
and income of the workers in developed nations

In developed nations, workers can benefit from their own
increasing productivity, meanwhile benefit from the
increasing productivity of developing nations due to the
lower prices of exported commodities
Different internal labor markets between developed
(relatively scarce and labor unions) and developing
(surplus labor, large unemployment, weak or non-existent
labor unions) nations

 Alleged Reasons for Deterioration in
the Commodity Terms of Trade

The demand for the manufactured export tends
to grow much faster in developing nations than
the demand for the agricultural and raw material
exports of developing nations

Due to the much higher income elasticity of demand for
manufactured goods than for agricultural commodities
and raw materials

Many developing nations have experienced a
large increase in the share of manufactured
exports in their total export, it makes the
calculation of terms of trade more complicated
 Historical Movement in the
Commodity and Income Terms of Trade

Controversial Topic
Prebisch and Singer research

Other research

Uncertain answer
See some data

 Conclusion



The terms of trade in developing nations are not
certain due to the fluctuation of the imported
and exported of commodities in the world
market
In a certain period of time , the terms of trade in
developing nations can be improved, and can
be also deteriorated
The studies on the terms of trade in developing
nations have no unique answer
11.4 Export Instability and
Economic Development




Cause and Effects of Export Instability
Measurements of Export Instability and Its
Effect on Development
International Commodity Agreements
Conclusion
 Cause and Effects of Export Instability

Developing nations may face large short-run fluctuations
in their export prices and earnings that could seriously
hamper their development
Inelastic demand of the primary export
Inelastic supply of the primary export

Illustration (Figure 11.1 page 369)


With D and S, the equilibrium price is P;

If D decreases to D’ or S increases to S’, the price falls
sharply to P’;

If D and S both shift , the price to P’’
Conclusion: inelastic and unstable demand and supply curves
for the primary exports of developing countries can lead to
wild fluctuations in the prices that these nations receive for
their exports

FIGURE 11-1 Price Instability and the Primary Exports of
Developing Nations.
 Measurements of Export Instability
and Its Effect on Development

Measurement of Export Earnings
MacBean (1966) defined the index of instability of export
earnings as the average percentage deviation of the dollar
value of export proceeds from a five-year moving average and
measured on a scale of 0 to 100

Export instability
MacBean postulates that the greater export instability
depended primarily on the type of commodities exported
E.G. The export of rubber, jute, and cocoa faced much more
unstable export earnings than petroleum, bananas, sugar and
Tabacco

International Commodity Agreement
Importance to stabilize the export earning of developing nations
 International Commodity Agreements
There are three basic types of international
commodity agreements: Buffer Stocks(缓冲存货),
Export Controls(出口管制), Purchase Contracts(购货合
同)

Buffer Stocks


It involves the purchase of the commodity when the
commodity price falls below an agreed minimum price, and
the sale of the commodity out of the stock when the
commodity price rises above the established maximum
price. ( International Tin Agreement)
Disadvantages: (1) some commodities stored with high
cost; (2) if the minimum price is set above the equilibrium
level, the stock grows larger and larger over time
 International Commodity Agreements

Export Control

It seeks to regulate the quantity of a commodity exported
by each nation in order to stabilize commodity prices

Main Advantage: it avoids the cost of maintaining stocks

Main disadvantage: it introduces the inefficiencies and
requires all major exporters of the commodity participate
International Sugar Agreement, International Coffee Agreement
E.G. OPEC (See the table)
 International Commodity Agreements

Purchase Contracts
It is a long-term multilateral agreement that stipulate a
minimum price at which importing nations agree to
purchase a specified quantity of the commodity and a
maximum price at which exporting nations agree to sell
specified amounts of the commodity

It can avoid the disadvantage of buffer stocks and export
controls

Disadvantage: it results in a two-price system for the
commodity
International Wheat Agreement

 Conclusion


Only a few (International Coffee Agreement) of
these are in operation today, and none seems
particularly effective. One reason for this is that
the very high operating costs and the general
lack of the support from developed nations
Modest Compensatory Financing Scheme (set up
in 1966 by IMF)
To compensate the developing nations below the previous fiveyear moving average of export earnings
11.5 Import Substitution versus
Export Orientation

Development Through Import
Substitution versus Exports

The Experience with Import
Substitution

Recent Trade Liberalization and Growth
in Developing Countries

Conclusion
 Development Through Import
Substitution versus Exports

Industrialization

Faster technological progress

The creation of high-paying jobs to relieve the serious
unemployment and underemployment problems

Higher multipliers and accelerators through greater
backward and forward linkages in production process

Rising terms of trade and more stable export prices and
earnings

Relief from balance-of-payments difficulties
 Development Through Import
Substitution versus Exports

Two Types of Industrialization

Import-substitution industrialization
Advantages: (1) reduced risks to set up an industry to replace
imports; (2) easier to compete with foreign competitors; (3)
induced tariff factories to set up
Disadvantages: (1) domestic industries accustomed to
domestic protection; (2) leading to inefficient industries; (3)
more difficult to produce more capital-intensive and high
technological imports
 Development Through Import
Substitution versus Exports

Export-oriented industrialization
Advantages: (1) to overcome the smallness of the domestic
market to reach the economies of scale; (2) the production of
manufactured goods for exports requires and stimulates
efficiency throughout the economy; (3) the expansion of
manufactured exports is not limited by the growth of the
domestic market
Disadvantages: (1) it may be very difficult to set up export
industries to compete with foreign producers; (2) high
protection in the labor-intensive industries of developed
nations
 The Experience with Import Substitution

Failure Experience
Such as, Argentina

Heavy protection and subsidies to industry led to
excessive capital intensity and relatively little labor
absorption

Import substitution led to the neglect of agriculture and
other primary sectors and the decline of the earnings
from the traditional exports

Import substitution aggravated the balance-of-payments
problems
Case Study 11-4 page 375
 Recent Trade Liberalization and
Growth in Developing Countries

1980s developing nations began to liberalize
trade and adopt an outward orientation

World Bank facilitated the planning and
carrying out of trade liberalization programs
with technical assistance and loans

Many of the liberalizing developing countries
jointed the GATT/WTO
See the following table
New International Economics System
 Conclusion


As for the industrialization strategy in
developing nations, it is hard to judge whether
the import- substitution strategy or the exportorientation strategy is better suitable for the
economic development
Each of the import substitution and export
orientation industrialization strategy has its
own advantages and disadvantages
11.6 Current Problems Facing
Developing Countries




Poverty in Developing Countries
The Foreign Debt Problem of Developing
Countries
Trade Problems of Developing Countries
Conclusion
 Poverty in Developing Countries
 Poverty in Developing Countries
 Poverty in Developing Countries
 The Foreign Debt Problem of
Developing Countries

Huge Foreign Debt

For the growing demand in capital
For the payment of high oil bills

Renegotiation of the Debt Payment Schedules
with the Help of the IMF

Reduced the debt burden of Latin America in
1989

Debt-relief plan by World Bank, IMF and
Individual Donor Nations
Case Study 11-6 page 380

 Trade Problems of Developing Countries

See Different Tables

Trade Imbalance
Trade Disputes
Higher Oil Prices
Poverty
Terms of trade




Trade Imbalance
Trade Disputes
Higher Oil Prices
Poverty
Terms of Trade
 Conclusion
The most serious problems facing developing
nations today are:

Poverty, especially Sub-saharan Africa

Unsustainable foreign debt of the poorest
developing nations

Protectionism of the developed nations against
developing nation’s exports
Chapter Summary
This chapter focuses on international trade on the
impact of the economic development in developing
nations.
 International trade has a positive impact on the
economic development
 International trade has a negative impact on the
economic development
 Two industrialization ways to facilitate the
economic development, each with advantages and
disadvantages
 Developing nations facing serious trade problems
Exercises
Discussion Problems:
Page 387 to 388 from 1 to 15 questions
Exercises
Additional Reading
For a discussion and evaluation of international trade as an
engine of growth, see:
 R.Nurkse, “Patterns of Trade and Development,” in R.Nurkse,
ed., Problems of Capital Formation in Underdeveloped
Countries and Patterns of Trade and Development (New
York:Oxfor University Press, 1970) PP.163-226
 J.Riedel, “Trade as an Engine of Growth in Developing
Countries, revisited,” Economic Journal, March 1984,pp.56-73
For measurements of the commodity terms of trade of
developing nations, see:
 United Nations, Relative Prices of Exports and Imports of
Underdeveloped Countries (Lake Success, N.Y.: United
Nations,1949)
Internet Materials






http://www.imf.org/external/pubs/ft/weo/2002/0
1/index.htm
http://www.unctad.org/en/pub/ps1tdr02.en.htm
http://www.undp.org/hdr2002
http://www.wto.org
http://www.oecd.org
http://www.worldbank.org