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Key Terms
Endogenous growth theory Single factoral terms of trade Double factoral terms of trade Export instability Import substitution industrialization Export oriented industrialization International commodity agreements Buffer stocks Purchase contracts Vent for surplus
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1 Introduction
Know the contributions of trade to development Discuss international trade and endogenous growth theory Discuss the various terms of trade and reasons for their deterioration Analyze the cause and effects of export instability Discuss how to develop economy thru import substitution or export promotion
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3 Terms of Trade
1. The commodity, or net barter, terms of trade (N) : It is the ratio of the price index of the nation's exports (Px to the price index of its imports (Pm) multiplied by 100 (to express the terms of trade in percentages). That is: N= (Px/Pm)100 2. Income terms of trade (I) : They are given by: I= (Px/Pm) Qx 3. Single factoral terms of trade (S): They are given by: S = (Px/PM) Zx 4. Double factoral terms of trade (D), They are given by: D = (Px/Pm)(Zx/Zm) 100
ANHUI UNIVERSITY OF FINANCE & ECONOMICS 8/28
In the examples, I and S can rise even when N declines. This is regarded as favorable to a developing nation. The most favorable situation is when N, I, and S all increase, the worst possible situation from the point of view or a developing nation occurs when all three terms of trade deteriorate. This may lead to immiserizing growth.
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4.3.4 Comments
Comments: With the exception of international coffee agreement, they either failed or have very limited success in stabilizing and increasing the export prices and earnings of developing nations. One reason for this is the high cost of operating them and the general lack of support by developed nations since they would have to shoulder most of the burden of setting up and running these international agreements.
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5.3 Summary
Import substitution may be of some benefit in the early stages of development (especially for larger developing nations), while an export orientation becomes an absolute necessity only later in the development process. Thus, rather than being alternatives, policies of import substitution and export orientation could profitably be applied to some extent sequentially, especially in the larger developing nations.
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7 Discussion Questions
Why can international trade not be expected to be an engine of growth for todays developing nations? What is meant by the commodity terms of trade? The income terms of trade?single and double factoral terms of trade? Which are the most significant terms of trade for developing nations? Why do some economists believe that the commodity terms of trade of developing nations have a tendency to deteriorate over time? What is import substitution and export orientation?
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THANK YOU!
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