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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 - PowerPoint PPT PresentationTRANSCRIPT
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 Developm
ent International Trade and Endogenous Gro
wth 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 TheoryTraditional 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)
1. 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
2. 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
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 a
nd 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 tradeIt 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 tradeI =(PX/ PM) QX (QX the index of the volume of exports)
The Various Terms of Trade Single factor terms of tradeS=(PX/ PM) ZX
ZX the productivity index in the nation’s export sector Double factor terms of tradeD=(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 EarningsMacBean (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 instabilityMacBean postulates that the greater export instability depended primarily on the type of commodities exportedE.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 AgreementsThere 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 comm
odity 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 five-
year 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 ExperienceSuch 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 export-orientation 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 NationsCase 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 devel
oping 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
ExercisesAdditional ReadingFor 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 Und
erdeveloped Countries (Lake Success, N.Y.: United Nations,1949)
Internet Materials
http://www.imf.org/external/pubs/ft/weo/2002/01/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