copyright © 2006 pearson addison-wesley. all rights reserved. chapter 12 trade theory and...

Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Chapter 12

Trade Theory and Development Experience

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 12-2

International Trade and Finance: Some Key Issues

Many LDCs rely heavily on exports (usually primary products)

Many LDCs also rely heavily on imports (typically of machinery, capital goods, intermediate producer goods, and consumer products)


Table 12.1


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 LDCs determine how much they trade? Is an outward-looking or an inward-looking

trade policy best?


The Importance of Trade for Development

LDC exports: trends and patterns (see Table 12.2)

Importance of exports to developing nations


Table 12.2


The Importance of Trade for Development

LDC exports: trends and patterns Importance of exports to different

developing nations Demand elasticities and export earnings

instability


The Terms of Trade and the Prebisch-Singer Thesis

Total export earnings depend on:– Total volume of exports sold AND– Price paid for exports

Prebisch and Singer argue that export prices fall over time, so LDCs lose revenue unless they can continually increase export volumes

Prebisch and Singer think LDCs need to avoid a dependence on primary exports


The Traditional Theory of International Trade

The principle of comparative advantage Relative factor endowments and

international specialization: the Neoclassical model


Figure 12.1


The Traditional Theory of International Trade

The principle of comparative advantage Relative factor endowments and

international specialization: the Neoclassical model

Trade theory and development: the traditional arguments


Some Criticisms of Traditional Free-Trade Theory in the Context of Developing-Country Experience

Six assumptions of the Neoclassical model must be scrutinized:


The Six Assumptions

The following assumptions of the Neoclassical model must be scrutinized:– Fixed resources, full employment, and

international factor immobility– Fixed, freely available technology and

consumer sovereignty– Internal factor mobility and perfect competition– Governmental non-interference in trade


The Six Assumptions (cont’d)

– Balanced trade and international price adjustments

– Trade gains accruing to nationals


Figure 12.2


Some Conclusions on Trade Theory and Economic Development Strategy

Trade can lead to rapid economic growth under some circumstances

Trade seems to reinforce existing income inequalities

Trade can benefit LDCs if they can extract trade concessions from developed countries

LDCs generally must trade Regional cooperation may help LDCs


Figure 12.3


Concepts for Review

Absolute advantage Balanced trade Barter transactions Capital account Collective self-reliance Collusion Commodity terms of

trade

Comparative advantage Current account Enclave economies Export dependence Export earnings

instability Factor endowment

trade theory


Concepts for Review (cont’d)

Factor mobility Factor-price equalization Foreign-exchange

earnings Free trade Gains from trade Globalization Growth poles

Income elasticity of demand

Income terms of trade Increasing returns Industrial policy Monopolistic market

control



North-south trade models

Oligopolistic market control

Prebisch-Singer thesis Price elasticity of

demand Primary products

Product cycle Product differentiation Quotas Regional trading

blocks Returns to scale Risk Specialization



Subsidies Synthetic substitutes Tariffs Trade deficits

Uncertainty Vent-for-surplus theory

of international trade

copyright © 2006 pearson addison-wesley. all rights reserved. chapter 12 trade theory and...

Documents

assumptions n

circumstances n trade

exports n prebisch

trade slide

n regional cooperation

country experience n

key issues n

development n ldc exports