GROWTH AND TRADE
Balanced vs. Biased Growth
Balanced growth shifts the PPC out proportionally (all outputs increase in proportion and
prices remain the same.
Growth biased toward production of one product shifts the ppc so it is skewed toward the
faster-growing product.
Rybczynski theorem: Assume 2 goods, constant product prices, growth in a country’s
endowment of one factor only leads to (lt) growth of output of the good using the growing factor
intensively and a decrease in the output of the other good.
The “Dutch Disease” is experienced when the windfall of a new natural resource (such as
Dutch development of natural gas production), production and profits of the traded industrial goods
sector decline. Cause? The new sector bids resources away from the industrial sector, especially
labor, as the new sector puts upward pressure on wage rates bidding for labor and higher interest
rates on capital as it bids for that.
When a country is already exporting, experiences growth in it’s export and the expansion
reduces the price of the export, we have “immizerising growth.” (See Figure 5.4) Here, growth
expands willingness to trade, but brings such a decline in the terms of trade that the country is worse
off. This occurs especially when growth is biased toward the export good, the foreign demand for
that good is price inelastic, and the country is largely dependent on that one, already heavily
export-oriented sector.
Growth can alter not only the capacity to supply products, but also the country’s demand for
products. With proportionate growth, the country has more income and expands consumption for
both goods. If the consumption of the growth good expands by more than a given amount, the
quantity of that commodity available for export declines. The changes depend on the tastes of the
consumers in the country (note the CICs).
In turn, changes in the willingness to trade can alter the country’s terms of trade if its large
enough to impact the international equilibrium. (A small country can’t affect the price
internationally.) With growth of cloth, by demanding fewer imports (a decreased willingness to
trade) the price of imports declines. So growth means: 1) the benefit of greater production, and 2)
improved terms of trade (better price for exports relative to imports. With an increased willingness
to trade, growth still yields benefit 1), but benefit 2) disappears; the net effect is unclear.
Technology and Trade.
Technology-based comp adv can arise and change over time as technological
advancements occur at different rates in different sectors and countries. (This idea completes with
the H-O Theory.)
International spread of technology is called diffusion.
Individual Products and the Product Cycle of Raymond Vernon.
R&D and initial production are likely in an advanced country. Over time the tech spreads
and becomes more standardized as the industry matures. Factor-intensity tends to shift away from
skilled labor toward less-skilled labor and production locations shift to other countries. The
innovating country ultimately becomes an importer. But it’s hard to predict the length or
progression of the phases of the cycle. In many industries product and production technoliges are
continually evolving as R&D is ongoing.
Question of industrial policy.