Contemporary Issues

in Global Economics
LECTURE 3:
International Trade Disputes
WIUT
Date: September 25th, 2017

Presenter: Akhror Burkhanov

Key glossary
Economic growth an increase in the amount of
goods and services produced per head of the
population over a period of time.
International trade exchange of capital, goods,
and services across international borders or
territories.
Globalization the increasing integration of
national economies into expanding international
markets.
Development the process of improving the quality
of all human lives and capabilities.
Economic growth

Measures how much (real) GDP per capita

grows over time.
There are huge differences in the historical
growth rates of different countries, which are
largely responsible for their differences in the
levels of GDP per capita.
Economic growth is a powerful tool for
poverty reduction.
Global GDP history
 2015 Pearson
The Power of Economic Growth Education, Inc

Richest and Poorest Economies

Real GDP per Capita Growth (%)
1960 2010
Luxembourg 17,601 75,589 2.91
Singapore 4,383 55,862 5.22
Norway 12,524 50,488 2.79
United States 15,398 41,365 2.00
Austria 15,256 41,114 1.98
Central African Rep. 968 589 0.99
Niger 861 522 1.00
Burundi 344 397 0.29
Zimbabwe 285 320 0.23
Dem. Rep. of Congo 696 241 2.10 6
Why did it happen???
7
*one of the reasons

8
Why do nations trade?

9
Global GDP and exports

Source: Based on data from UNCTAD and from WTO

-
Some Key Issues
International trade has often played a central role in
the historical experience of the developing world
Many developing countries rely heavily on exports of
primary products with attendant risks and uncertainty
Many developing countries also rely heavily on
imports (typically of machinery, capital goods,
intermediate producer goods, and consumer
products)
Some Key Issues (contd)
Five Basic Questions about Trade and
Development
How does international trade affect economic
growth?
How does trade alter the distribution of income?
How can trade promote development?
Can developing countries determine how much
they trade?
Is an outward-looking or an inward-looking trade
policy best?
Some Key Issues (contd)

The importance of exports to developing nations

Exports of developing countries are generally less
diversified than those of developed countries
Merchandise exports as a share of GDP are often
higher for developing countries
The Traditional Trade Theory

Relative factor endowments and

international specialization: the
Neoclassical model
Heckscher and Ohlin (factor endowment
theory)
Different products require productive
factors in different ratios
Countries have different endowments of
factors of production
The Traditional Trade Theory
The Traditional Trade Theory
18
Mercantilism
Mercantilism calls for maximization of exports:
system based on the fact that a nations wealth is
built on exporting more than you import.
Popular economic system dominating European
thinking in 15th-18th century
The period began with voyages of Columbus
and da Gama & ended with the industrial
revolution
Adam Smiths absolute advantage

Born in Kirkcaldy,
Scotland
Lived 1723-1790
Professor at Glasgow
at age 28
Wealth of Nations 1776
Absolute Advantage
The ability of a party (an individual, firm or
country) to produce a greater quantity of a good or
service than competitors, using the same amount of
resources.
Smith argued that it was impossible for all nations
to become rich simultaneously by following
mercantilism because the export of one nation is
another nations imports
All nations could gain simultaneously if they
practiced free trade and specialized in accordance
with their absolute advantage.
Absolute Advantage

USA UK
Wheat (bushels/man-hour 6 1
Cloth (yards/man-hour) 4 5

US exchanges 6W for 6C : US better off by 2C

UK frees up 6 hours to produce 30C. After trade
UK has an extra 24 C.
Comparative advantage

London 1772-1823
Parents Sephardic Jews
from Portugal
Married a Quaker,
Priscilla Wilkinson
Worked as a Stockbroker
Principles of Political
Economy & Taxation 1817
MP 1919-23
Comparative Advantage

The law of comparative advantage states

that a country can benefit from trade even if the
other country has an absolute advantage in both
goods.
The country should specialise in the production
& export of the good in which it has the smallest
disadvantage.
Comparative Advantage
USA UK
Wheat (bushels/man-hour 6 1
Cloth (yards/man-hour) 4 2
US is better at producing both products.
US can produce more Wheat than Cloth.
UK is better at producing Cloth.
US exchanges 6W for 6C with UK.
US gains 2C since could exchange 6W for 4C domestically.
UK gains as it would take 6 man hours to produce 6W.
Instead the UK can produce 12C.
Net gain for UK= 6C
Trade Theory: Conclusion

Main conclusion of the neoclassical model is that all

countries gain from trade
World output increases with trade
Countries will tend to specialize in products that use
their abundant resources intensively
International wage rates and capital costs will
gradually tend toward equalization
Returns to owners of abundant resources will rise
relatively
Trade will stimulate economic growth
Trade Theory: Conclusion

Trade promotes international and domestic

equality
Trade promotes and rewards sectors of
comparative advantage
International prices and costs of production
determine trading volumes
Outward-looking international policy is
superior to isolation
Traditional Debate
Trade pessimist arguments
Limited growth of world demand for primary
exports
Secular deterioration in terms of trade
Specializing in comparative advantage inhibits
industrialization, skills accumulation, and
entrepreneurship
Rise of new protectionism; WTO benefits
limited in practice
Traditional Debate
Trade optimist arguments - trade liberalization:
Promotes competition and efficiency
Generates pressure for product improvement
Accelerates overall growth
Attracts foreign capital and expertise, which are in scarce
supply in most developing countries
Generates foreign exchange to use for food imports if
agricultural sector lags behind or suffers natural
catastrophes
Eliminates distortions caused by government interventions
including corruption and rent-seeking activities
Promotes equal access to scarce resources
Enables developing countries to take full advantage of
reforms under the WTO
Main Readings

The World Economy. 6th edition. Chapters 2&3

Beth V. Yarbrough and Robert M. Yarbrough
Economic Development. 12th edition. Chapter 12.
Michael P. Todaro and Stephan C. Smith
Taiwans Strong Economic Growth

Fastest- and Slowest-Growing Economies

Real GDP per capita Growth (%)

1960 2010
Singapore 4,383 55,862 5.22
Botswana 674 9,676 5.33
South Korea 1,656 26,609 5.71
Taiwan 1,862 32,105 5.69
Equatorial Guinea 611 13,959 6.26
Guinea 915 788 0.30
Madagascar 1,052 703 0.81
Central African Rep. 968 589 0.99
Niger 861 522 10
Dem. Rep. of Congo 696 241 2.10
2015 Pearson
Education, Inc