Int Econ Ch7

Front 1

Economic Growth
—Changes in productive capacity, two sources

Back 1

a. Increases in countries’ endowments of production factors
b. Improvements in production technologies

Front 2

Balanced Versus Biased Growth
- Balanced

Back 2

a. Balanced Growth—growth in which the ppc shifts out proportionately so that its relative shape stays the same.

Front 3

Balanced Versus Biased Growth
- Biased

Back 3

b. Biased Growth—growth more heavy in one product resulting in the output of the other product to grow less, stay the same or decline. See Fig. 5.1
i. This happens when the country’s endowments of different factors grow at different rates, or when the technologies change at different rates.

Front 4

Growth in Only One Factor
a. Rybczynski Theorem

Back 4

a. Rybczynski Theorem—growth in the country’s endowment of one factor of production, with the other factor unchanged, results in an increase in the output of the good that uses the growing factor intensively, and a decrease in the output of the other good. (In other words, the development of a new resource such as oil or gas may retard development of other production like cloth manufacturing.)

Front 5

Growth in Only One Factor
b. The “Dutch Disease”

Back 5

b. The “Dutch Disease”—The Dutch discovered new natural gas fields under the North Sea, they began to farm them and export the gas, but the more they developed the gas the more depressed the manufactured goods trade became. The lesson was the more you export a good, you will either have to export less of another good, or import more to bring the balance of trade back into equilibrium. (similar to Immiserizing growth)

Front 6

Changes in the Country’s Willingness to Trade (2 reasons)

Back 6

a. As growth occurs, the people have a change in real income, more discretionary spending; if the price of the two products stays the same, the country could 1) increase its willingness to trade (import and export more) or 2) decrease its willingness to trade (import and export less).
b. The changes in the consumption quantities depend on the tastes of the consumers, as summarized by the CICs.

Front 7

Effects on the Country’s Terms of Trade
- small country (i.e. a price taker)

Back 7

its trade has no impact whatsoever on international price ratio, i.e. the terms of trade.

Front 8

Effects on the Country’s Terms of Trade
- Large Country (reduction in the willingness to trade)

Back 8

the price of imports decrease and the price of exports increases as well as changing the equilibrium on the international terms of trade, which is good for them, to all of this there are two benefits:
1. production benefits as the ppc shifts outward
2. improved terms of trade, thus better prices for exports relative to imports, thus a flatter terms of trade line.

Front 9

Effects on the Country’s Terms of Trade
- Large Country (Increase in the willingness to trade)

Back 9

the price of imports increases and the price of exports decrease, thus a decline in the terms of trade, however, if the terms of trade don’t decline too much, then the country gains overall from the growth.

Front 10

Immiserizing Growth
- definition

Back 10

growth that expands the country’s willingness to trade can result in such a large decline in the country’s terms of trade that the country is worse off. Three conditions must be present for IG to occur

Front 11

Immiserizing Growth
i. step one
ii. step two

Back 11

i. The country’s growth must be strongly biased toward expanding the country’s supply of exports (increasing its willingness to trade), and the increase in export supply must be large enough to have a noticeable impact on world prices.
ii. The foreign demand for the country’s exports must be price inelastic so that an expansion in the country’s export supply leads to a large drop in the international price of the export good.

Front 12

Immiserizing Growth
iii. step three
iv. lesson learned

Back 12

iii. Before the growth, the country must be heavily engaged in trade so that the welfare loss from the decline in the terms of trade is great enough to off set the gains from being able to produce more.
iv. Individual rationality can add up to collective irrationality. (Lesson to be learned: it is better to favor import-replacing industries than export-expanding ones, these will turn world prices to your favor)

Front 13

Technology and Trade
a. Technology

Back 13

R&D very important in high tech companies, it creates ongoing stream of new and improved technology over time.

Front 14

Technology and Trade
b. Individual Products and the Product Cycle

Back 14

A new product is often a luxury, produced by skilled labor in the country where it was developed, however, as the product matures, and the technology is more standard, unskilled laborers begin to make the product in other developing countries.

Front 15

Technology and Trade
c. Openness to Trade Affects Growth

Back 15

i. Openness to international trade affects how fast a country’s economy can grow and how its capabilities are able to change.
ii. The benefits include:
1. Access to new and improved products.
2. Incentives to innovate.
3. Facilitation of diffusion of foreign technology, and acceleration of domestic development of technology