international economics

1. International Trade and
Economic Growth
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2. Objective
• classical and neoclassical
• Gains from Trade and Terms of Trade
• Trade as Vent for Surplus and Economic Growth
• Trade as an Engine of Economic Growth- Dynamic Gains
• Trade as an Engine of Economic Growth – Historical Experience
• Trade after the Post-Second World War Period
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3. classical and neoclassical
• The classical and neoclassical economists believed that international
trade played a vital role in accelerating economic growth of the
countries. In fact they called international trade as an ‘engine of
economic growth’.
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4. • The contribution of trade to economic growth, according to them, is
determined partly from static and partly from dynamic gains that flow
from foreign trade. International trade permits all countries to
specialize through reallocation of resources in the production of those
goods in which they have comparative advantage
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5. • classical economists considered comparative advantage as
determining the pattern of trade. Not the use of surplus resources
but resource reallocation allowed trade to benefit a country by
producing a more efficient international allocation of resources.
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6. • Lastly without any increase in resources or technological change,
every trading country is able to enjoy a higher real income by
increasing production according to its comparative advantage and
trading.
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7. Gains from Trade and Terms of Trade
• Of course, the gains from trade to the countries specialising in
production of different goods and trading with each other depend on
terms of trade, that is, rate of exchange of goods between any two
countries trading with each other.
• Thus static gains from trade can accrue to a trading country if its
terms of trade are favourable.
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8. • It is through reallocation of resources from goods in the production of
which they are relatively inefficient to the production of goods in
which they have greater efficiency.
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9. • Adam Smith, emphasised the role of trade in utilising fully the
country’s resources, if they are initially lying idle and unemployed.
When such a country enters into foreign trade, it opens up the
possibility of a ‘vent for surplus’, that is, using the surplus resources
for producing for exports which it can exchange for imports which it
cannot produce at home for which it has an unsatisfied demand.
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10. • vent for surplus’ implies that a country would be moving from a point
within the given production possibility frontier to a point on it. This is
called a ‘static gain’
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11. Trade as Vent for Surplus and Economic
Growth
• the growth of countries of South East Asia and Africa through ‘primary
exports as an engine of growth’ in the colonial period on the basis of ‘vent
for surplus’
• “When underutilised land or labour was ‘vented’ as a result of colonisation,
as was typical during the nineteenth century, the gains from trade were
often purchased at high cost to indigenous population.
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12. Trade as an Engine of Economic Growth-
Dynamic Gains
• dynamic gains which result from a greater degree of degree of division of labour and
specialisation when a country is opened to world trade resulting in rise in productivity of
their resources and permits a country to reap the benefits of economies of scale.
• J. S. Mill, a classical economist, writes, “The tendency of every extension of the market
improves the process of production. A country which produces for a larger market than
its own can introduce a more extended division of labour and make greater uto make
innovations and improvements in the processes of productionse of machinery and is
more likely.”
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13. • Thus the gains from export will spread to other sectors of the
economy through what Keynes later called multiplier effect and lead
to what has been called export-led growth.
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14. • To sum up, according to Meier, the gains from trade on development from the
viewpoint of underdeveloped countries are mainly of three types:
• (1) Those that widen the market, induce innovations and raise productivity;
• (2) Those that promote saving and capital formation; and
• (3) Those that have an educative effect in instilling new wants and tastes and in
transferring technology, skills and entrepreneurship. The emphasis is on the
supply side of the development process.
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15. Trade as an Engine of Economic Growth –
Historical Experience
• historical experience shows that the traditional theory has been
mainly proved correct except its conclusion about the gains the poor
underdeveloped countries would derive from international trade by
specialising in exports of primary goods.
• In the eighteenth century Britain had the industrial revolution
through technological breakthrough.
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16. • Similarly, Japan under the Meiji rulers in the early twentieth century achieved rapid
industrial growth in which, among other things, trading with other countries made an
important contribution to its rapid growth.
• Similarly, international trade played a crucial role in the industrial development in North
America and Austria. English capital opened up mines and plantations and built railroads
in America, Canada and Australia. This led to the development of these countries and as
these countries opened up they provided expanding markets for the products of Europe
which led to the rapid growth in European countries.
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17. Conclusion
• It is evident from above that whereas for industrialised developed
countries international trade proved to be an engine of growth, for
underdeveloped countries under the colonial rule exports of primary
products in exchange for industrial goods from developed countries
did not lead to the overall growth of their countries. In fact they
remained backward and poor.
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18. Trade after the Post-Second World War Period
• The situation significantly changed after the post- Second World War
period with the attainment of independence from the colonial rule by the
underdeveloped countries.
• The country suffered from the exports of primary products for the
exchange of manufactured goods India and Latin American countries
adopted import-substitution policy to accelerate their industrial growth.
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19. • East Asian countries such as Taiwan, Hong Kong, Singapore, Thailand,
Indonesia and Malaysia which are generally called Asian Tigers
achieved a higher economic growth through international trade by
promoting their exports of industrial products. After 1991 India also
gave importance to the expansion of exports in the economic reforms
and structural adjustment policy initiated in 1991. India’s export of
software services also grew rapidly.
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20. • Since 1950 there has been liberalisation of world trade on a large
scale, first under GATT established in 1947 and then under WTO
which replaced GATT in 1995. Barriers to trade such as tariffs and
non-tariff barriers and quantitative restrictions such as quota, licenses
were brought down significantly to promote world trade.
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