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. 

Economic growth can be described graphically as an outward shift in a nation’s production possibility Fortier (PPF) curve (see fig). Thus, if one production factor grows, then the PPF will expand largely in the direction of commodity, which enjoys its comparative advantages. If both factors grow, then PPF tends expands more uniformly in all directions. If two factors grow exactly the same rates, then the overall capital labor ratio will remain unchanged over time. Growth necessarily affects with production and consumption. This is because the price line that is tangent to the PPF will also be shifting out with growth, reflecting fact that a nation with growing endowment of productive resources is able to undertake growing amount of consumption. Thus, since growth affects both production and consumption, it tends to affect international trade, because international trade is the difference between a nation’s production and its consumption as indicated in the equation.

 

Fig. 2.4 Pattern of Production, Consumption and Growth

       C+I+G+X=Y+IM  -------------->    (2.1)

 (Where C= consumption, I= Investment, G= Government Expenditure, X = Exports, Y= annual income and IM= Imports.

The relationship between growth, production, consumption and international trade were explained under three scenarios .

1) Neutral Economic Growth: A proportionate increase in all factors and consumption so that trade expands proportionately to the growth of the economy .

2) Protrade biased Growth: When an economy grow because of a relative expansion in the supply of the factor used intensively in the production of exportables, there will be a tendency for the output of exportables to rise relative to the output of the importables and for international trade to rise percentage terms by an amount greater than the percentage expansion of GDP. This type of growth is called pro trade biased growth (ibid P. 287).

3) Antitrade biased Growth: When an economy grows as a result of a relative expansion in the supply of the factor used intensively in the production of the importables, there will be a tendency for the output of importables to rise relatively to the exportables and for the international trade of this country to fall. This type of trade is called antitrade-biased growth (ibid P. 287).

 The relationship between growth, production and trade is varied according to technological change and international mobility of production factors, specially labor and capital. Thus, a country can grow by acquiring production factors (labor and capital) from other countries. For instance, the growth of the United States in the last century was occurred due to the considerable immigration of foreign workers and inflow of foreign capital. Factor inflows from foreign countries tend to raise welfare in the host country and to lower welfare in the source country .

Because of the strong relationship between trade and growth, all developing countries peruse outward looking or primary export led development strategies that encouraging the production of exports. According to past experience of newly industrialized countries, it seems that trade has successfully contributed for the rapid development of many countries. Though empirical evidence in some countries indicate strong relationship between international trade and growth, still many countries follow trade restrictions due to some arguments i.e. strategic trade, infant industry and import substitution.

References:

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

Husted, Steven, and Melvin, Michael. International Economics, Pearson Education ltd and Higher Education Press: Addison Wesley Longman Inc, 2002 PP 147-217