Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
Introduction Most trade theory discussed so far is static in nature. However, factor endowments, technology and tastes can change over time, changing a nation’s comparative advantage. Changes in factor endowments, technology and tastes affect a nation’s production frontier, offer curve, volume and terms of trade, and gains from trade.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
Growth of Factors of Production Increases in labor (L) and capital (K) shift the production frontier outward. Type and degree of shift depend on rate of growth:
If only L grows, output of both commodities increases. Output of the L-intensive commodity will increase faster than that of the K-intensive commodity (the opposite is true if only K grows).
Growth and Trade: The Small-Country Case A “small country” is too small to affect the relative commodity prices at which it trades
(so the nation’s terms of trade remain constant).
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
Technical Progress All technical progress reduces the amount of both labor and capital required to produce any given level of output. Three different types of Hicksian technical progress:
CHAPTER S E V E N
7
International Economics
Tenth Edition
Economic Growth and International Trade
Dominick Salvatore
John Wiley & Sons, Inc.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
Growth of Factors of Production The Rybczynski Theorem
For example, if only L grows in Nation 1, the output of commodity X (the L-intensive commodity) expands more than proportionately, while the output of commodity Y (the K-intensive commodity) declines at constant PX and PY.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
FIGURE 7-1 Growth of Labor and Capital Over Time.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
Growth of Factors of Production Increases in labor (L) and capital (K) shift the production frontier outward. Type and degree of shift depend on rate of growth:
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
Growth and Trade: The Small-Country Case Growth is protrade if:
output of a nation’s export commodity grows proportionately more than the output of its import commodity at constant relative commodity prices, leading to greater than proportionate expansion of trade. Otherwise, growth is antitrade, or neutral.
In this chapter:
Introduction Growth of Factors of Production Technical Progress Growth and Trade: The Small-Country Case Growth and Trade: The Large-Country Case Growth, Change in Tastes, and Trade in Both Nations
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
Technical Progress The same rate of neutral technical progress in production of both commodities has the same effect on the production frontier as balanced factor growth. The production frontier will shift out evenly in all directions at the same rate at which technical progress takes place.
Balanced growth is when L and K grow at the same rate, shifting frontier out evenly in all directions. Slope on each frontier are equal where cut by a ray from the origin.
1. 2. 3.
Neutral Labor-saving Capital-saving – increases productivity of L proportionately more than the productivity of K. So L is substituted for K in productSalvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
FIGURE 7-2 The Growth of Labor Only and the Rybczynski Theorem.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
Technical Progress All technical progress reduces the amount of both labor and capital required to produce any given level of output. Three different types of Hicksian technical progress:
1.
Neutral – increases productivity of L and K in same proportion, so K/L remains the same after the technical progress as before, at unchanged relative factor prices (w/r).