Economic Development
Lecture 15: International Trade
Life Impact | The University of Adelaide
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Overview
• Introduction
• Exports and imports
• International trade theory
• Import substitution v Export promotion
• Exchange rates
• Economic integration
• International trade reform
Slide 1
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Introduction
• Globalisation
• GATT
• WTO
• Different views on globalisation:
– Free trade = good
– Protectionists
– Save the poor!
– Environmentalists
Slide 2
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
The WTO is a bloodsucker…?
Slide 3
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Exports and imports
• Export dependence
– Oil producing states
– Primary products – up to 25% of export
earnings!
– Long-term prices of primary products are
going down…
Slide 4
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Primary product prices going down
Slide 5
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Primary product prices going down
Slide 6
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Exports and imports
• Low income elasticity of demand for primary
products
• Price elasticity of demand for primary products is
usually inelastic
– Price volatility
• Combination of two effects = export earnings
instability
• What about manufactured goods?
Slide 7
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Exports and imports
• Import dependence
– K, components, raw materials
– Balance of payment problems
– Cultural imperialism v ideas
• (Commodity) terms of trade
– PX / PM : Prices of average imports relative to
average exports
Slide 8
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Exports and imports
• Prebisch-Singer Thesis
– Import substitution industrialisation
– Diversification into manufacturing
– Basic v advanced manufactured goods
Slide 9
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
International trade theory
• Traditional theory: comparative advantage
– Specialisation
– Gains from trade
– Gains even with absolute advantage
Slide 10
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
International trade theory
• Relative factor endowments (Neoclassical
trade model)
– Relative endowments in land, L, K
– Specialisation in abundant factor
– Assumes:
• Relative factor-intensity
• Different factor endowments
Slide 11
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
International trade theory
• Theoretical conclusions:
– All countries gain, output increases
– Incomplete specialisation: increasing opportunity
costs
– Factor equalisation?
– More abundant factor increases in price
– Moving outside our PPCs: stimulation of economic
growth
Slide 12
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
International trade theory
• Criticisms:
– Immobility of factors of production
– Resource underutilisation -> easy export growth?
– Technology substitution
– Consumer sovereignty
– Slow intrastate factor mobility
– International market power
Slide 13
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
International trade theory
• Criticisms:
– Uncertainty
– Government intervention
• Protection
• Industrial policy
– Foreign ownership
Slide 14
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
International trade theory
• Some preliminary conclusions:
– Central role for international trade
– Income inequality issues
– Gains from trade sometimes limited
– Source of capital
– Collective self-reliance
Slide 15
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Import substitution v Export promotion
• Import substitution
– Pre-90s
– Requires strong protection
– Growth from domestic market
– Diversification
– Government intervention
Slide 16
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Tariffs
(in case you
forgot…?)
Slide 17
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Import substitution v Export promotion
• Import substitution - Problems:
– Infant industry ‘never grows up’
– Inefficient allocation of resources
– Income inequality
– Overvalued exchange rates
Slide 18
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Import substitution v Export promotion
• Export promotion
– Internationally competitive – if successful!
– Used by the four tigers?
– Primary export expansion?
– Manufacturing export expansion?
Slide 19
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Import substitution v Export promotion
• Industrialisation strategy approach
– A role for industrial policy
– Import substitution then Export promotion?
– Technology transfer
– FDI, joint ventures
– Non-preferential but active support for
exporters
– Industry-specific infrastructure, human capital
Slide 20
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Exchange rates
• Overvaluation
– Options:
• Run down reserves / borrow foreign
exchange
• Reduce D (protection)
• Exchange controls
• Devalue currency!
• China…
Slide 21
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Exchange rates
• Dual/parallel exchange rates
– Declared rate (critical imports)
– Undeclared rate (luxury imports)
– Corruption!
• Free-floating exchange rates
– Prone to price volatility, speculation
• Managed floating exchange rate
Slide 22
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
Economic integration
• Free trade area
• Customs union
• Common market
• Monetary union
• Why?
– Division of labour, economies of scale
– Economic benefits v political sovereignty
– Convergence / divergence
Slide 23
University of Papua New Guinea
Lecture 15: International Trade
Michael Cornish
International trade reform
• Prospects for developing countries heavily
dependent on developed countries
• Regional integration an obstacle?
• Lowering of tariffs and non-tariff barriers
– Extensive margin v intensive margin
• Compensation/assistance for displaced workers?
• Floating exchange rates (esp. China?)
Slide 24
University of Papua New Guinea