Chapter 11 International Trade and Economic Development

11.1 Introduction

The relationship between international trade

and economic development Terms of trade (different types) and their effects on economic development The exports instability in developing countries the trade policies and the main problems from the developing countries

11.2 The Importance of Trade to Development

Traditional trade theory & economic development:

comparative advantage traditional trade theory fixed pattern of development; Traditional trade theory incorporated with changes in factors supplies, technology, and tastes: the development pattern could be changed; The trade theory of comparative statics: shows relevance for developing nations and developing process. International trade functioned as an engine in 19th century: UK;U.S.; Canada; New Zealand; Australia; Argentina, Uruguay, and South Africa

The contributions of trade to development

Trade can lead to the full utilization of otherwise underemployed domestic resources; Trade makes possible division of labor and economies of scale (such as Taiwan, HK, Singapore); International trade is the vehicle for the transmission of new ideas, technology, managerial and other skills; Trade also stimulates and facilitates the international flow of capital from developed to developing countries; The importation of new manufactured products has stimulated domestic demand until efficient domestic production of these goods become feasible (Brazil,India); International trade is an excellent anti-monopoly weapon because it stimulates greater efficiency by domestic producers to meet foreign competition.

International trade and endogenous growth theory

Romer(1986) and Lucas(1988): positive

relationship between trade and long-run economic growth and development; New theory of endogenous growth: lowering the trade barriers will speed up the economic growth and development in the long-run

11.3 The Terms of Trade and Economic Development

N=(PX/PM)100terms of trade ()

I=(PX/PM)/QXincome terms of trade ( QX

) S= (PX/PM)/ZX: Single factoral terms of income ( ZX) D= (PX/PM)/ (ZX/ ZM)100:Double factoral terms of trade ( ZM) Among the 4 defined terms of trade, N,I,S are the most importantespecially for developing countries.

Alleged reasons for deterioration in commodity terms of trade in developing countries

Most or all of the productivity increases that take

place in developed countries are passed on to their workers in forms of higher wages and income, while most or all the productivity increases that take place in developing nations are reflected in lower prices; The demand for the manufactured exports of developed nations tends to grows much faster than the demand for the agricultural and raw materials exports from developing nations.

11.4 Export Instability and Economic Development

Cause and effects of instability: wild

fluctuation in prices of the primary exports is due to both inelastic and unstable demand and supply. The empirical study shows that export instability was not very large and that has not hampered development. International commodity agreement.

11.5 Import Substitution versus Export Orientation: trade policy of developing countries
Import substitution industrialization (ISI): the

substitution of imports by domestic production Export-oriented industrialization (EOI): based on comparative advantage Empirical evidences show that EOI has better effects than ISI: HK and Singapore versus India and Pakistan Recent trade liberalization and growth in developing countries

11.6 Current Problems Facing Developing Countries

Poverty

Foreign debt
Trade problems: trade frictions between

developed and developing nations Call for a new international economic order