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Growth and International Trade

Growth and Trade. The basic story is:if a country is small, we know it can't affect international prices (the terms of trade)if the country is large, it will affect international prices when it experiences growthSince the effect on prices offset somewhat the effects of growth,a small country wil

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Growth and International Trade

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    1. Growth and International Trade This chapter covers the effects of growth on international trading patterns and the terms of trade. Growth stems from two main sources: 1. technological change 2. increases in the endowment of factors The effect of growth depend on the source of growth and on the reaction of consumers tastes to growth growth in the export sector or factor intensively used to produce exports can increase trade growth in the import sector or factor intensively used to produce imports can reduce trade

    2. Growth and Trade The basic story is: if a country is small, we know it cant affect international prices (the terms of trade) if the country is large, it will affect international prices when it experiences growth Since the effect on prices offset somewhat the effects of growth, a small country will experience stronger effects on its trade pattern than a large country. NOTE: import goods refer to a countrys import competing goods (those produced at home), NOT to the imports themselves

    3. Production Effects of Growth A country starts with a given volume of trade growth can cause the country to increase both its export and import goods proportionally (this is called trade neutral production effect of growth)

    4. Production Effects of Growth growth can cause both export and import goods to grow, with exports increasing more than imports (this is called pro-trade production effect of growth (area I))

    5. Production Effects of Growth growth can cause exports to increase and import goods to decrease, (this is called ultra-pro-trade production effect of growth (area II))

    6. Production Effects of Growth growth can cause both exports and imports to grow, with imports increasing more than exports (this is called anti-trade production effect of growth (area III)) growth can cause imports to increase and exports to decrease, (this is called ultra-anti-trade production effect of growth (area IV)) each of these effects are shown on the following graph

    8. Consumption Effects of Growth Tastes also change as a country increases its output capacity, and the shift in the indifference curve can have similar effects to the shift in the ppf Why? With growth, the income distribution of the country changes therefore the people whose tastes most strongly determine the distribution of income can change (Example: growth in population due to immigration the demand for western music and classic movies may fall, and demand for world music and anime (sp?) may rise)

    9. Consumption Effects of Growth Tastes also change as a country increases its output capacity, and the shift in the indifference curve can have similar effects to the shift in the ppf growth can cause the country to increase both its tastes for exports and imports proportionally (this is called trade neutral consumption effect of growth)

    10. Consumption Effects of Growth growth can cause both tastes for exports and imports to grow, with export-good demand increasing more than demand for imports (this is called anti-trade consumption effect of growth (area I)) growth can cause tastes for export goods to increase and imports (and import-competing goods) to decrease, (this is called ultra-anti-trade consumption effect of growth (area II))

    11. Consumption Effects of Growth growth can cause tastes for both exports and imports to grow, with import demand increasing more than exports (this is called pro-trade consumption effect of growth (area III)) growth can cause tastes for imports to increase and demand for exports to decrease, (this is called ultra-pro-trade consumption effect of growth (area IV)) each of these effects are shown on the following graph

    12. ultra-pro-trade

    13. The Total effect the total effect depends on both the consumption and production effect. a) both ultra-anti-trade --> total decrease b) pro-trade prod. neutral cons.,--> total increase c) ultra-pro-trade production with pro-trade cons.--> total increase

    14. Sources of growth and ppf technological change can be neutral, or commodity specific

    15. Increase in factor endowments increase in a factor increases production of both goods, but has a greater effect on the good that uses the factor intensively

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