Charpter 7PDF Growth and Trade(07-07-02)

CHAPTER 7 Economic Growth andInternational Trade1. Introduction2. Growth of Factors of ProductionPopulation↗→S L↗→S K↗2.1 Assumption:1. All units of L and K are homogeneous.2. Nation Produce two commodities:X – L-intensiveY – K-intensive3. Under constant returns to scale2.2 Labor Growth and Capital Accumulation Over Time2.2.1 Explain:1. PF 1→PF 22. Balanced Growth (P B =P B’)3. The right panel4. The left panel5. L K L K R R P =⇒=//P6./,D RI Capita Welfare →⇒→→7. /,,/L K L R R K L P RI Capita >⇒//222 8. /,,/L K L R R K L P RI Capita <⇒/////4. The Rybczynski Theorem4.1 Magnification effectIn the 2-factor, 2 goods Heckjscher-Ohlin model, an influx of workers from across the boarder would shift the production possibility curve outward and decrease the production of the capital-intensive product.4.1.1 Example:,L X Y ⇒//2(P X /P Y →)4.1.2 Assumption:Both L and K are mobile.4.1.3 Proof:/,/,,(/),(/)X Y L K if L to keep P P w r K L P P X K L Y K L ⇒→⇔→⇔→→→⇔//22/4.1.4 Illustration:When the production possibility frontier shifts out relatively move in one direction, we have biased growth.Explain:1. Point B (130, 20), P B =12. Point M (270,10), P M =15. Technical ProgressCapital accumulation /Technical progress *RI capita ⎧⎫⇒⎨⎬⎩⎭/5.1 Neutral, Labor-Saving, and Capital-Saving Technical ProgressNTP ()'(()'()L K X L K P P KK L L w w r r A A A ⇒=⎧⎫=⎪⎪⎪⎪⇒⎨⎬⎪⎪=⎪⎪⎩⎭⇒+=22//{}L-S TP (C-S TP)()()()()()()K L K L X L K P P P P K L subsitute for L K K L w at L K rK LA A A L K→⇒><⇒⇒→⇒+=//22//////5.2 Technical Progress and the Nation’s Production FrontierIf22(),()1:2:3:()L K P P case Only in xcase Only in ycase both in x and y balanced trade ⇒//5.2.1 Explain:1. AB →A’B’2. Balanced growth3. The figure4. ,2()(50,60)'(100,60)(130,20)'(260,20)(,)(2,)(140,0)'(280,0)(0,70)'(0,70)L K X P A A B B O X Y O X Y C C D D →⎧⎫⎪⎪→⎪⎪⇒→⎨⎬→⎪⎪⎪⎪=⎩⎭/5.2.2 Conclusion:In the absence of trade, all types of technical progress tend to increase the nation’s welfare.6. Growth and Trade: The Small-Country Case6.1 The effect of Growth on TradeFactor growth and technical progress result in an outward shift in the nation’s production frontier. What happens to the volume of trade depends on the rates at which the output of the nation’s exportable and importable commodities grow and on the consumption pattern of the nation as its national income expands through growth and trade.//I E E I X Y X Y C C O O or P P P P protradeαα⎛⎞⎛>>⎜⎟⎜==⎝⎠⎝⇒////⎞⎟⎠z Production effect z Consumption effectWhat happens to the volume of trade in the process of growth depends on the net result of these production and consumption effects.productionNet effect protrade antitradeprotrade VT ↗ > O ↗? consumption antitrade ? VT ↗ < O ↗6.2 Illustration of Factor Growth, Trade, and Welfare6.2.1 Assumption:1. L double, but nation’s terms of trade do not change with growth and trade.2. Nation is too small to affect relative commodity price.6.2.2 Explain:1. Point B and point E2. Consumption frontier PM.3. P M and point M4. the bottom panel.6.2.3 Question:1. What we can conclude?2. What type of commodity is X and Y?3. What would happen if one of the commodities is inferior?Answer:1. Since the output of commodity X increased while the output of commodity Y declined, thegrowth of output is protrade. Similarly, since the consumption of commodity Y increased proportionately more than the consumption of commodity X, the growth of consumption is also protrade. With both production and consumption protrade, the volume of trade expanded proportionately more than the output of commodity X.2. The fact that consumption of both commodities increased with growth and trade means thatboth commodities are normal goods.3. Only if commodity Y (X) had been an inferior good would Nation1 have consumed a smallerabsolute amount of Y (X).6.3 Technical Progress, Trade, and Welfare6.3.1 Assumption:1. At constant relative commodity prices.2. Constant L and population3. Constant terms of trade6.3.2 Conclusion:z Neutral technical progress in the production of exportable commodity (X) only is protrade.z Neutral technical progress in the production of importable commodity (Y) is antitrade.z Technical progress, depending on the type, may increase or decrease trade, but it will always increase social welfare in a small nation.Production of exportable commodityNeutral Protrade neutral RT↗(same rate)consumptionantitrade VT↗ < P↗Protrade VT↗ > P↗7. Growth and Trade: The Large-Country CaseTo analyze the effect of growth on production, consumption, trade, and welfare when the nation is7.1 The effect of Growth on welfare7.1.1 The TT effect of growth⇒Growth⇒VT↗（↘），P→TT↘7.1.2 The Wealth Effect⇒Growth⇒（+）-△O/(N P/N W) Welfare↘→（↗）7.1.3 Effect of Growth on WelfareWelfareThe Effect of TT↗↘The wealth + ↗UnclearEffect - Unclear ↘7.1.4 Assumption:1. Nation1 is large enough to affect relative commodity prices.2. Growth⇒expand the V T at P M=P B=1⇒TT→↘3. Only L doubles⇒welfare effect↘4. Growth took place only in Nation1.7.1.5 Illustration:1. Point T2. Curve Ⅳ<CurveⅦ3. The bottom panel7.2 Immiserizing Growth (Jagdish Bhagwati)z Not very prevalent in the real world.z More likely to occur in developing countryz Immiserizing growth could occur to a poor country experiencing export-biased economic growth.7.2.1 Illustration:7.2.1.1 Explain:1. Shift of the production frontier2. CurveⅡ<CurveⅢ7.2.1.2 Question:1. What’s the effect of growth on welfare?2. When the immiserizing growth is more likely to occur?Answer:1. The wealth effect, by itself, would increase Nation1’s welfare at constant prices becauseNation1’s output increases while its labor force (L) and population remain constant. However, since this type of technical progress tends to increase the volume of trade, Nation1’s terms of trade tend to deteriorate.2. Immiserizing growth is more likely to occur when:z Growth⇒Exp↗ at TT→z E2 is low⇒TT1↘↘z N1 is large⇒Exp↗⇒TT↘7.3 Illustration of Beneficial Growth and Trade7.3.1 Explain:1. Point E and P B=12. Point U (Wealth effect)3. Point W (TT effect)4. Offer curves (Total effect)7.3.2 Question:What’s the effect of growth only in K (scarce factor) on welfare? Answer:⇒If The wealth effect welfare↗⇒And TT↗Then: welfare↗8. Growth, Change in Tastes, and Trade in Both Nations 8.1 Growth and Trade in Both Nations8.1.1 Assumption:Both nations are large.8.1.2 Illustration:Explain:1. Curve 1 and 22. Curve 1* and 2*; Curve 1’ and 2’3. Point E 14. Point E 2 only L doubles in N 15. Point E 3 only K doubles in N 26. Point E 47. Point E 5 (only K doubled in N 1)8. Point E 6(only L doubled in N 2)9. Point E 78.1.3 Conclusion:With balanced growth or neutral technical progress in the production of both commodities in both nations, both nations’ offer curves will shift outward and move closer to the axis measuring the nation’s exportable commodity. In that case, the volume of trade will expand and the terms of trade can remain unchanged or improve for one nation and deteriorate for the other, depending on the shape of each nation’s offer curve and on the degree by which each offer curve rotates.8.2 Change in Tastes and Trade in Both Nationsz Economies grow ⇒production frontier offer curve⇒z Tastes change Indifference map offer curve⇒⇒z N 1 (D Y )↔(D X ) N 2I1111()()11*,Y X T IF D S offer curve of N shift from to V TT ⇒→⇒⇒/2//2*22222,X T IF D offer curve of N shift from to V TT ⇒⇒//212,Y X IF D D offer curve will rotate differently⇒/28.2.1 Conclusion:With growth and/or a change in tastes in both nations, both nations’ offer curves will shift, changing the volume and/or the terms of trade. What happens to the volume of trade and the terms of trade then depends on the type and the degree of the change in tastes taking place in each nation.Regardless of its source, a shift in a nation’s offer curve toward the axis measuring its exportable commodity tends to expand trade at constant prices and reduce the nation’s terms of trade. Opposite shifts in the nation’s offer curve tend to reduce the volume of trade at constant prices and improve the nation’s terms of trade. For a given shift in its offer curve, the nation’s terms of trade will change more, the greater is the curvature of the trade partner’s offer curve.。