International Trade and Growth

Irrespective of any government policies and theories, there is always a tendency for economic growth to occur . For instance, increases in population imply a growing labor force. Investment in new plant and equipment by firms implies a larger and larger capital stock. Likewise, technological advances in the world indicate that allow for higher efficiency in production. Thus, despite these general tendencies in economic growth over the world, international mobility of production factors and technological innovations were greatly influenced for development of the modern world. 

International trade and SOLOW model

 Though all the theories and models of international trade so far discussed were highlighted the direct effect of international trade, new growth models which were mainly based on Solow growth model reflect effect and impact of trade on economic growth of any particular country. According to SOLOW model, international trade can change an economy’s stationary state in the short run and economic growth in the medium- run as the economy moves from one steady to another. The model of increasing returns to scale indicate that trade increases the real value of goods available to consumers by producing more goods which has comparative advantage and importing goods which lack comparative advantage. Richard Baldwin interpreted this as an increase of production function, as increase in the value of real goods produced . Joy Mazumdar qualified Baldwin’s idea by pointing out that a country may not be able to increase its rate of growth in the medium term if it exports capital goods and imports consumer goods . Thus, according to Mazumdar’s idea, Baldwin’s application of the SOLOW model to international trade suggests that capital importing developing countries might gain more from international trade than developed economies.

References

            Solow, Robert.  “A contribution to the Theory of Economic Growth”, Quarterly Journal of Economics, 1995 16Vol. 70(1): pp 65-94.

            Baldwin E. Richard. “Measurable Dynamic gains in Trade,” Journal of political Economy, 1992(100)11:  162-174.

            Mazmdar Joy “Do static gains from trade lead to medium run growth,” Journal of political Economy, 1996: 104(6).

            Hendrik Van Den Beng. Economic Growth and Development, Chapters 4, 5 and 6,   McGraHill: 2001 pp114-211

Alternative International Trade Theories

After World War 2, new trade theories were developed as an alternative to HO model. These theories were fall into two main categories; (1) Theories developed to overcome some rigidities of HO model (2) theories developed to abundant HO framework. New theories are much general than HO model . It includes; 

        

Specific Factors Model

  

The specific factor model was presented by Paul Samuelson and Ronald Johns in 1971. It assumes an economy that produces two goods and that can allocate its labor supply between two sectors. The model allows for the existence of factors of production beside labor. Where as labor is a mobile factor and it can move between sectors, other factors are assumed to be specific, and they can be used only in the production of particular goods. The specific factor model assumes that each of the specific factors capital and land can be used in only sector, manufactures and food, respectively. Only labor can move in either sectors. Thus to analyze the economy’s production possibilities, it is necessary to ask how the economy’s mix of output changes as labor is shifted from one sector to the other. In the specific factor model, factors specific to export sectors in each country gain from trade, while factors specific to import competing sectors lose. Mobile factors that can work in either sector may either gain or lose. Nonetheless, trade provides overall gains in the limited sense. Thus the model provides detailed description of income distribution effects of international trade

Heckscher –Ohlin’s Factor Endowment Theory (H-O Theory)

 the theory was introduced by two Sweden economists namely Eil Filip Heckscher and Bertil Gotthard Ohlin in 1933. According to the theory, a country will have comparative advantage in, and therefore will export; that good whose production is relatively intensive in the factor with which that country is relatively well endowed. Thus, the country which is relatively capital abundant compared wish the other country will have a comparative advantage in producing capital intensive goods and a country which has abundant labor; it will have a comparative advantage in producing labor intensive products. Compared to absolute and comparative advantage models, HO model is a complete model of the workings of an economy as it engages in international trade . The theory can summarize as follows;

Theories related to International Trade

  

As mentioned above article, theoretical base of the international trade were distinguished under three categories such as classical, neoclassical and modern theories. Classical views of international trade were emphasized on three main factors. It includes gains from the trade, Structure and Direction of trade and the terms of trade. Likewise, neoclassical thoughts were also based on three factors such as Introducing social indifference curve, Introduce offer curve and Edgeworth and Concept to determine equilibrium of the international trade. Unlike the concept of constant opportunity cost in classical thoughts, neoclassical views are mainly based on increasing opportunity cost.

Introduction to International Trade

Globalization is not a recent phenomenon. The information shows that the world economy was just as globalized 100 years ago as it is today. As a result of widespread mercantilism since 16^th and 17^th centuries, the world trade also expanded in the world through business firms of Western Empires. For instance, South East Indian Firm was the leading commercial company handling trade and business between Western Europe and South East Asian countries. Along with the development of mercantilism and capitalism theory of International Trade also developed in Western Europe by famous classical economists such as Adam Smith and