Effects of economic growth on international trade

Effects of economic growth on international trade. Economic growth may take the form of either factor accumulation or technical growth or both. Economic growth has production and consumption effects.

Production Effects on Growth

The production effects of factor accumulation or growth emphasize the behavior of domestic production of exportable.

Increased production of exportable tends to decrease the volume of trade and an increase in the production of importable tends to decrease the volume of trade.

Johnson Has classified:

The production effects of factor growth into five types.

  • Growth is neutral if it increases the production of exportable and importable goods in the same proportion.
  • It is anti-trade-biased or imports biased if it increases the production of importable in greater proportion than the production of exportable.
  • It is pro-trade-biased or export biased if it increases the production of exportable greater proportion than the production of importable.
  • It is ultra-pro-trade-biased or ultra export biased if greater reduces the domestic production of importable.
  • Finally, it is ultra-anti-trade-biased or ultra import biased if it reduces the production of exportable.

In formal terms, it will be pro-trade-biased, neutral, anti-trade-biased according to as the output elasticity of supply of importable goods is less than equal to or greater than unity.

Formally, ultra-pro-trade biased means a negative output elasticity of supply of importable, and ultra-anti-trade has a negative output elasticity of supply of exportable.

There are nine assumptions which are as under:

  • There are two countries A and B
  • Country A is the domestic country that experiences economic growth.
  • There are two factors of production of labor and capital.
  • There are two commodities X and Y
  • Commodity X is capital intensive and Y is labor-intensive.
  • Commodity X is exportable any Y is importable.
  • International terms of trade are constant.
  • There is no change in technology.
  • There is incomplete specialization.

Effects of economic growth on international trade. by Diagram

 

Effects of economic growth on Production
Effects of economic growth on Production

In figure A is exportable and capital is measured along the horizontal axis and importable B and labor along the vertical axis.

In the pre-growth situations, BA is the production possibility curve, and MX the terms of trade line which is tangent to the former at the production point P.

Economic growth resulting from labor or capital growth or from both leads to an outward shift of the production possibility curve.

Such a situation has not been depicted on the international terms of trade line M’X’ in the post-growth situation.

It is presumed that the line M’X’ is tangent to the production possibility curve which determines each production point.

The terms of trade are constant because the line M’X’ is parallel to the MX line. When the production point P shifts upward to N growth is neutral.

If the new production point is between N and L. the growth is pro-trade-biased. If the new production point lies in the range L and X’, the growth is ultra-pro-trade.

If the new production point falls down N and R, the growth is anti-trade-biased. If the new production point lies in the range RM’ the growth is ultra-anti-trade-biased.

 

Consumption Effects of Growth

The consumption effects of factor growth emphasize the behavior of domestic consumption of importable.

Increased consumption of importable tends to increase the volume of trade and increase consumption of exportable tends to decrease the volume of trade.

Like the production effects, Johnson has classified:

The consumption effects of factor growth into five types.

  • On the consumption side, growth is neutral if it increases the total demand for importable in the same proportion as the increase in the demand for exportable.
  • Growth is anti-trade-biased or import-biased if it increases the demand for importable is lesser proportion than it increases them exportable.
  • It is pro-trade-biased if it increases the demand for importable in greater proportion than increase the demand for exportable.
  • It is ultra-pro-trade-biased if it increases the demand for importable absolutely.
  • It is ultra-anti-trade-biased if it decreases the demand for importable absolutely.

Formally, it can be related to the output elasticity of demand for importable.

Growth is pro-trade-biased neutral or anti-trade-biased, according to as the output elasticity of demand for importable is greater than, equal to, or less than unity.

Ultra-anti-trade-biased if this elasticity is negative, and ultra-pro-trade-biased if the output elasticity of demand for exportable is negative.

Assuming constant terms of trade, constant tastes, no change in income distribution, the possible consumption effects of growth are as under with the help of the diagram.

Effects of economic growth on international trade. by Diagram

Effects of economic growth on Consumption
Effects of economic growth on Consumption

 

In this diagram exportable A and capital are measured along the horizontal axis. importable B and labor are measured along the vertical axis.

In the pre-growth situation, the economy production at P and consumption at point C where the terms of trade line MX is tangent to the community indifference curve CI.

In the post-growth situation, the economy produces at point N and the consumption point can be anywhere on the new-consumption-possibility frontier M’X’.

The line MX is parallel to M’X’ showing constant terms of trade. It is presumed that at such points as K, G, and H, different community indifference curves touch’s the line M’X’.

  • If the new consumption point lies at G on the income consumption curve OCG passing through the origin, the consumption effect is neutral.
  • If C moves to the region GH, the consumption effect is export-biased.
  • If C moves to the region HM’ the consumption effect is ultra-export-biased.
  • If C moves to the region GK, the consumption effect is import-biased.

In the region KX’ ultra-import-biased.

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