Lecture 11
TRADE AND GROWTH

• Is Trade an Engine for Growth?

• LDCs may export agricultural goods, raw materials

However:

(a) Do not ignore benefits of trade: Efficient allocation of resources

(b) LDCs export large amounts of manufactured goods (Africa is an exception)

(c) Product cycle hypothesis

• Stages in the life of a product
  • New product stage
  • Growth stage
  • Mature stage
    
    
• Example
  • Initially, U.S. produced and exported TV sets
  • Next stage: Imports from Japan
  • Mature stage: Imports from S. Korea, Taiwan
    

Need for industrialization?

• Without industry, domestic savings will remain low
  • MPS is small for workers
  • Higher MPS for capitalists
  • Industrial profits will generate more savings ...
    ... and thus more I, and faster economic growth
    

However:

• Going against comparative advantage
• Loss in efficiency
• Licensing controls, bureaucracy

• Decline in price of primary products relative to that of manufacturing goods

4.1 Long-term decline in export prices for LDCs

• Inelastic labor supply in DCs; elastic labor supply in LDCs
• Increase in labor demand leads to higher wages in DCs; not so in LDCs (sketch)
• Prices of manufactured goods increase; not those of primary goods

(a) Consider effects of technological improvements
• Largely occurring in industry
• Use demand and supply curves to show that ...
  ... Prices of manufactured goods will fall
• Terms of trade will move in LDC's favor!

(b) Need to adjust for quality of manufactured goods

4.2 Low income elasticity of demand for LDC exports

• As world income rises, expenditure on food does not rise much

• How about demand for raw materials?
  
  
  

• Supply-side problems
• Infrastructure bottlenecks
  
  
  

6. Instability of export revenues

• Large fluctuations in the prices of primary products

However:

• Country must choose appropriate risk-return tradeoff
  
  
  

7. Market failure arguments

• Economies of scale
• Learning-by-doing
• Dynamic linkages among sectors

7.1 Justification for restrictive trade

• Infant industry argument
• "Big push"

However:

• Presumes that market failure can be corrected by govt
• How about government failure?
• Rent-seeking activities