International Economics

Growth and Transfers

Manuel Fernandez de la Concha Rebollo (mfernandez0998@hotmail.com)

1. Consider a standard trade model with two countries, Spain and China. If there is
unbiased growth in China, analyze the effect on the welfare of Spain.

In normal conditions China will produce the product in which is more competitive that are
shoes. With unbiased growth: both sectors growth the same way, it will increase the
production of wine.
We could say that it is an import-biased growth. In this case it tends to improve a growing
country’s terms of trade at the rest of the world’s expense.
Therefore it will decrease the welfare of Spain.

2. Uganda receives foreign aid from the EU. Shows that welfare in Uganda could fail
in spite of receiving aid.

Foreign aid is a transfer of income to the receiving country. In this case Uganda will
receive this transfer of income, but as it has a strong preference for consuming cars it will
spend this additional income in increasing the purchase of cars and so its external position
could worsen.

In the attached graph it is shown the relationship of foreign aid with per capita growth in
developed countries. As the graph shows countries with the highest aid proportion has the
slowest per capita growth.
Generally, there are no conclusive results from the empirical literatures on the relationship
between foreign aid and economic growth. Specifically, for the case of foreign aid some
studies founds that, foreign aid has a direct and positive impact to the economic growth.
However, some studies empirically proved that, good economic environment is main
prerequisites to ensure the positive impact of foreign aid to the economic growth. The
increase in foreign aid can distorts domestic saving, increase domestic consumptions and
discourages tax revenue in Uganda.