1

Outline
Introduction
Balanced and Biased Growth
Rybczynski Theorem
The Dutch Disease
The Terms of Trade (ToT)
Immiserizing Growth
Technology and Trade
The roduct !ycle
Trade and Growth
"isconce#tions$ De%industrialization
&inal Thoughts on &uture of Trade
'
Introduction
(hy trade and economic de)elo#ment*
&or the times+ they are ,always- a%changin.
Manufactured goods as a Percent of Merchandise Trade
UK US
Exports Imports Exports Imports
1910 75.4 24.5 47.5 40.7
2008 71.0 67.8 74.8 65.3
/
Introduction
!hanging !om#osition of De)elo#ing%!ountry 01#orts
2
Introduction
3
Introduction
(hy trade and economic de)elo#ment*

To understand the causes and effects of economic

growth among countries

!h4 5 focuses on changes in #roducti)e

ca#abilities that occur in the economy o)er time

These production-side changes generate

economic growth
6
Introduction
Growth can arise from

"ore factors of #roduction

o#ulation growth (labor)

Real in)estment (#hysical ca#ital)

0ducation 7 training (human ca#ital)

8atural resources (disco)eries)

9and reclamation (land)

Technological change : diffusion

5
Introduction
&igure 34/ ; <hares of the (orld.s &actor
0ndowments+ '==5%'=1=
>
Introduction
?s nations de)elo#+ their com#arati)e ad)antage can
also change with changes in factor endowments
Ty#ically+ they become relati)ely more #hysical
ca#ital and skilled labor abundant
This has im#lications for trade
@
Balanced vs. Biased Growth
Balanced growth

<hifts the ##c outward but does not change its

sha#e

The economy can now #roduce #ro#ortionally

more of both goods

If #rices don.t change+ the country will #roduce

#ro#ortionally more of both goods
!auses

ro#ortionate increases in both factors of

#roduction

Balanced technological change

1=
Balanced vs. Biased Growth
&igure 5414? % Balanced growth (small country)
!a#acity to #roduce wheat increases by
(11@ % >3):>3 A 2=B
!a#acity to #roduce cloth increases by
(>2 % 6=):6= A 2=B
roduction of wheat increases by
(11' % >=):>= A 2=B
roduction of cloth increases by
('> % '=):'= A 2=B
>3
11@
1'
Balanced vs. Biased Growth
Biased growth

<hifts the ##c outward+ but the shift is skewed

toward one #roduct

If #rices don.t change+ #roduction of this good

increases+ but #roduction of the other #roduct
increases by a lesser #ro#ortion+ stays the same+
or declines
!auses

"ore than #ro#ortionate increases in one factor of

#roduction

Biased technological change

1/
Balanced vs. Biased Growth
&igure 5414B ; Growth biased toward cloth #roduction
The country has a com#arati)e ad)antage in
wheat #roduction (e1#orts wheat)
There is a more than #ro#ortionate shift in
the ##c toward cloth
roduction of cloth increases and+ in this
case+ #roduction of wheat remains
unchanged
The com#arati)e ad)antage in wheat is less
strong and trade declines
Growth sufficient biased in fa)or of the
im#orted good can switch a country.s
com#arati)e ad)antage to this good
12
Balanced vs. Biased Growth
&igure 5414! ; Growth biased toward wheat #rod4
The country has a com#arati)e ad)antage in
wheat #roduction (e1#orts wheat)
There is a more than #ro#ortionate shift in
the ##c toward wheat
roduction of wheat increases and+ in this
case+ cloth remains unchanged
Cere+ biased growth results in increased
e1#orts and reinforces the country.s
com#arati)e ad)antage in wheat
16
Rybczynski Theorem
?ssum#tions

' goods

roduct #rices remain constant

The country.s endowment of 1 factor grows

The country.s endowment of the other factor is

constant
Results

Dut#ut of the good that uses the growing factor

intensi)ely increases

Dut#ut of the other good decreases

15
Rybczynski Theorem
&igure 54' ; <ingle%&actor Growth
The country has a com#arati)e
ad)antage in wheat #roduction
(e1#orts wheat)
(heat is land intensi)eE cloth labor
The amount of labor increases
roduction of cloth increases (labor
intensi)e)
roduction of wheat decreases (land
intensi)e)
1>
Rybczynski Theorem
The reasoning behind the Rybczynski Theorem

If only labor is growing+ the e1tra labor goes to

the labor%intensi)e industry ; cloth

!loth #roduction increases

"ore cloth #roduction reFuires not only e1tra

labor but some e1tra land

<ome land (and labor) are acFuired from the

wheat sector

(heat #roduction declines

1@
The Dutch Disease
8atural resource disco)eries may retard other
industries
The natural resource is now relati)ely more
abundant
?ccording to the Rybczynski Theorem+ this sector
will draw resources away from other sectors
01am#le$ The 8etherlands

8ew natural gas fields in the 8orth <ea

8atural gas #roduction drew resources away from

other sectors

Dutch manufacturing declined

'=
The Dutch Disease
Dther #ossible e1am#les

Britain (oil)

8orway (oil)

8igeria (oil)

Russia (oil)

Genezuela (oil)

Brazil (oil and minerals)

?ustralia (minerals)
'1
Terms o trade !ToT"
The ratio of e1#ort #rices to im#ort #rices
01am#le$ The H< e1#orts wheat and im#orts cloth
Pwheat A I'+ Pcloth A I1
<o+ ToT A units of im#orts #er unit of e1#orts
The ToT determines how much a country recei)es
for a unit of e1#orts
wheat of cloth:unit of units '
cloth of I1:unit
wheat of I':unit
=
''
Terms o trade !ToT"
H< e1#orts wheat and im#orts cloth from RD(
Initially+

(heat$ I1 #er unit 1 (:! 1 !:(

!loth$ I1 #er unit

H< ToT A Pwheat : Pcloth A 1

Then+

(heat$ I' #er unit J (:! ' !:(

!loth$ I1 #er unit

H< ToT A Pwheat : Pcloth A '

&or the H<+ the ToT ha)e im#ro)ed
&or the RD(+ the ToT ha)e deteriorated
'/
Terms o trade !ToT"
<mall country ; considered abo)e

!hanges in its im#orts and e1#orts do not affect

world #rices ; does not affect on its ToT
9arge country

!hanges in its im#orts and e1#orts can affect

world #rices ; can affect its ToT
0)en if a country is small in terms of GD+ it can be
KlargeL

!Mte d.I)oire % /542B of world out#ut

'2
Terms o trade !ToT"
9arge country

If growth results in the country being less willing

to trade+ then the relati)e #rice of the country.s
e1#ort #roduct increases

In this case+ growth benefits the country

By e1#anding its #roduction ca#abilities

Im#ro)ing its terms of trade

'3
Review# $mall %ountry
%onstant ToT
&igure 5414B ; Growth biased toward cloth #roduction
The country has a com#arati)e ad)antage in
wheat #roduction (e1#orts wheat)
There is a more than #ro#ortionate shift in
the ##c toward cloth
roduction of cloth increases and+ in this
case+ #roduction of wheat remains
unchanged
The com#arati)e ad)antage in wheat is less
strong and trade declines
'6
&ar'e %ountry
Improvin' ToT
&igure 54/ ; Growth Biased Toward Re#lacing Im#orts
This reduces the
country.s demand for
cloth (im#orts)
relati)e to its e1#orts
This reduces the
#rice of cloth
(im#ort) relati)e to
wheat (e1#ort)
The country.s ToT
im#ro)e
The country benefits
from more
#roduction and
better ToT
'5
Immiserizin' Growth
&igure 542 ; Immiserizing Growth in a 9arge !ountry
This increases the
country.s su##ly of wheat
(e1#orts)
This reduces the #rice of
wheat (e1#orts) relati)e to
cloth (im#ort)
The country.s ToT
deterioriate
The country benefits from
more #roduction but loses
in its ToT
In #rinci#le+ this can make
the country worse off
'>
Technolo'y and Trade
Cow can differences in technology affect trade*
!om#arati)e ad)antage can result from

Relati)e factor abundance (C%D)

Differences in technology between countries

Recent tests of C%D ha)e also accounted for

differences in technology

These tests ha)e been more successful at

e1#laining trade #atterns than tests that account
for factor abundance alone
'@
(ho are the Technolo'y
&eaders)
C%D again

Gi)en that research and de)elo#ment (R7D) is skilled labor

intensi)e+ de)elo#ed countries ha)e a com#arati)e ad)antage in
technological inno)ation
R7D

01isting #roducts (lower costs)

8ew #roducts
Traditionally+ new technology was used in the country where it was
de)elo#ed
It was ty#ically ada#ted to local factor #ro#ortions
Cowe)er+ some new technology today is de)elo#ed by
multinational firms in R7D centers for a##lication in other
#roduction locations
Cowe)er+ in order to affect #roducti)ity+ the new technology must
be ado#ted
/=
*ow +uch Does
Technolo'y Dier)
Nuite a lot+ Trefler (1@@3)
?ssum#tion$ Technological differences between
countries takes a multi#licati)e form
? gi)en set of in#uts #roduces only O times as much
as in the H<
Estimated efficiency, 1983 (US = 1)
Country
O
Bangla!s" 0.03
#"a$lan 0.17
%ong Kong 0.40
'apan 0.70
(!st )!rmany 0.78
/1
Technolo'ical Diusion
and %onver'ence
Cowe)er+ in order to affect #roducti)ity+ the new
technology must be ado#ted
The s#read of technology to other locations is called
KdiffusionL
The diffusion of technology to de)elo#ing countries
would seem to be a #otential source of ra#id growth
This would hel# them Kcon)ergeL on de)elo#ed li)ing
standards (catch%u# effect)
/'
(hat &imits Technolo'ical
%onver'ence)
Technology transfer is easier said than done
The new technology may need to be ada#ted to
factor #ro#ortions of other countries
It may not be a##ro#riate to the le)el of human
ca#ital+ etc4+ e4g4+ cotton #roduction
?da#ting it may reFuire+ in effect+ additional R7D
01am#le$ Industrial Re)olution ; British )s4 H<
te1tile #roduction methods
//
Technolo'y and Trade#
,roduct %ycle *ypothesis
This is an older alternati)e trade theory
It attem#ts to e1#lain the #attern of trade in terms
of technological de)elo#ment
8ew #roduct ; #roduction in a de)elo#ed country

Hsually e1#ensi)e+ so a limited market

roduced in small Fuantities by skilled workers

0arly )ersions are usually work in #rogress

Dngoing R7D to im#ro)e #roduct and #roduction

Hseful to #roduce close to customers to Fuickly

incor#orate feedback
/2
Technolo'y and Trade#
,roduct %ycle *ypothesis
? standardized:mature #roduct ; #roduction in a
de)elo#ing country

Dnce the #roduct and #roduction methods ha)e

been standardized+ #roduction can mo)e to
unskilled%labor abundant locations
De)elo#ed countries ; e1#ort new #roducts
De)elo#ing countries ; e1#ort mature #roducts
01am#les$ te1tiles+ la#to#s
Cowe)er+ this #attern may not ha)e sur)i)ed
offshoring and the rise of multinational firms
/3
Trade and Growth
(hat is the relationshi# between o#enness to trade
and economic growth*

!asual em#iricism

Isolated countries are among world.s #oorest

8orth Porea

"yanmar

!ountries ha)e e1#erienced dramatic increases in

growth rates following o#ening to trade

!hina

India
/6
Trade and Growth
(hat is the relationshi# between o#enness to trade
and economic growth*

Two sources of gains$ static and dynamic

<tatic gains ; a one%time increase in std4 of li)ing

The gains from the initial o#ening for trade

These are gains from trade associated with

s#ecialization and trade according to com#arati)e
ad)antage

They could also include gains in )ariety

Dynamic gains ; a higher rate of growth

/5
Trade and Growth
<tatic gains from trade
(ith trade+ the country s#ecializes in
wheat #roduction
Gains from trade are re#resented by
the ability to consume more of both
goods
Gains can also come from the ability
to im#ort raw materials and
intermediate goods at lower cost
In other words+ the country can
s#ecialize in those tasks where it has
a com#arati)e ad)antage
/>
Trade and Growth
<tatic gains

These are fairly small as a B of GD

Dynamic gains

9arge em#irical literature indicates these gains are

significant o)er time

<ources

8ew technology:diffusion ; can im#ort ca#ital goods

that embody more ad)anced tech4

Incenti)es ; com#etition in larger #otential market ;

more inno)ation

"ore ra#id accumulation of #hysical and human ca#ital

/@
Trade and Growth
Dne method$ D#enness and growth

<achs and (arner (1@@3)

5> countries were classified according to o#enness

D#enness A lack of controls on international trade

and #ayments and lack of central #lanning
!en "#osed
*!+!lop$ng
!,onom$!s
4.49- 0.69-
*!+!lop!
!,onom$!s
2.29- 0.74-
2=
Trade and Growth
?nother method$ Trade ratio and growth

9ewer and Gan den Berg ('==/) ; re)iew

Trade ratio A (X Q M) : Y Y A GD

? long%run increase in the trade ratio of 1=B

increased the growth rate by at least 'B

This includes gains in #roduction

It does not include the gains from )ariety

21
Trade and Growth
Difficulties

!ountries that o#en to trade differ in terms of

other #olicies

olicy regimes can change under #ressure from

I"&+ donors+ etc4

India

Greater o#enness from 1@@1

But other market%oriented reforms at same time

2'
+isconceptions#
De-Industrialization
!hanging !om#osition of De)elo#ing%!ountry 01#orts
2/
+isconceptions#
De-Industrialization
22
+isconceptions#
De-Industrialization
23
+isconceptions#
De-Industrialization
8ote$ Dfficial figures may o)erstate the decline in
manufacturing since many manufacturing firms ha)e
outsourced many ser)ices that were #re)iously handled
in house
?ctual de%industrialization can occur because of

Increases in resource endowments

Rybczynski effect

Dutch disease

Dther changes in com#arati)e ad)antage

But for most countries technological change is
res#onsible for the decline in man4 em#loyment
26
+isconceptions#
De-Industrialization
?griculture

roducti)ity growth has been ra#id

<hare of em#loyment in agriculture has fallen

Ret food #roduction has increased

<hare of income s#ent on food has declined

"anufacturing

roducti)ity growth has been ra#id

<hare of em#loyment in manufacturing has fallen

Ret manufacturing out#ut has increased

Relati)e #rice of manufactures has decreased

In constant #rices+ the manufacturing share of

GD is more stable
25
+isconceptions#
De-Industrialization
<er)ices

roducti)ity growth has been less ra#id+ though it

is also harder to measure

The share of em#loyment in ser)ices has increased

!onclusion$ Trade is not the #rimary factor in the
decline in de)elo#ed country manufacturing
em#loyment

De)elo#ed countries manufactured e1#orts and

im#orts ha)e increased

De)elo#ed countries ha)e shifted away from less to

more skill intensi)e manufactures
2>
The -uture o Trade
The Great .nbundlin'
Trade has become more com#le1 in recent years
Traditionally+ trade in)ol)ed final goods
Trade has come to encom#ass

<er)ices

Intermediate goods
This is associated both with

Dffshore outsourcing

roduction in multi#le locations by multinational

firms
2@
The -uture o Trade
The Great .nbundlin'
Grossman 7 Rossi%Cansberg+ Baldwin #a#ers ('==6)
&irst unbundling ; Trade in goods

This allows #roduction to be distant from

consum#tion

This is the ty#e of trade Ricardo discussed ;

ortuguese wine for 0nglish cloth

Trade allows firms in different countries to

com#ete in the market for final goods

The assum#tion here is that all #roduction ste#s

are done in the same country
3=
The -uture o Trade
The Great .nbundlin'
<econd unbundling ; Trade in tasks

roduction is di)ided into se#arate tasks

These are then s#read around world according to

!om#arati)e ad)antage

Dther #roduction ad)antages+ e4g4+ #ro1imity to

clients

&irms around the world can com#ete for each

outsourced task
31
The -uture o Trade
The Great .nbundlin'
&or society+ the second unbundling #romises
additional gains from trade
&or workers+ offshoring is one of the unsettling
features of globalization
!hanges in technology can allow international
com#etition in tasks that were #re)iously KsafeL
<o far+ the shifts in em#loyment due to outsourcing
a##ear to be modest
3'
*ow -ar %ould This Go)
Tradable Industry.s <hare of 0m#loyment
3/
(hat is Tradable)
,I-n the future+ and to a great e1tent already
in the #resent+ the key distinction for
international trade will no longer be between
things that can be #ut in a bo1 and things that
cannot ,good )s4 ser)ice-4 It will+ instead+ be
between ser)ices that can be deli)ered
electronically o)er long distances with little or
no degradation in Fuality+ and those that
cannot
% ?lan Blinder ('==6)
32
(hat is Tradable)
?s suggested abo)e+ technological inno)ation is
e1#anding the range of tradable ser)ices
(hat determines whether a task is tradable*

Tradable ; im#ersonal ser)ices

Re#etiti)e+ routine tasks

8o loss in Fuality from remote communication

8ot tradable ; #ersonal ser)ices

Tasks that must be #erformed locally+ e4g4+

#lumbers+ electricians+ etc4

Tasks that reFuire direct contact with the end user