international economics

1. Effects of Technical Progress
on International Trade

2. Meaning
• Several empirical studies, however, have led to the conclusion that
contribution of technical progress in an increase in national income or
product is much more significant than that of growth of labour supply
or capital accumulation.

3. • J.R. Hicks has classified the technical progress into neutral, labour-saving
and capital-saving.
• Whatever is the nature of the technical innovations, they cause a shift of
the isoquant towards the origin, the level of output remaining the same. It
means the technical progress enables a firm to produce the same quantity
of a commodity by employing lesser quantities of the factor inputs.

4. Technical Progress Is Neutral
• The technical progress is neutral, when it raises the marginal
productivity of capital and labour in the same proportion at the given
capital-labour ratio or alternatively, it leaves the capital-labour ratio
unchanged.

5. Technical Progress is Said to be Labour- Saving
• The technical progress is said to be labour- saving, when it raises the
marginal productivity of capital relative to that of labour at constant
ratio of capital to labour. In other words, in case of labour- saving or
capital-using technical progress, the capital- labour ratio marks an
increase.

6. Technical Progress is Capital-saving
• The technical progress is capital-saving or labour-using, when it
causes an increase in the marginal productivity of labour relative to
capital at the given capital-output ratio. In case of such technical
progress, the capital-labour ratio undergoes a decline.

7. The neutral, labour-saving and capital-saving
technical progress is shown through Fig.

8. • Fig 1=The capital-labour ratio (K/L) is measured by the slope of the same line OR and OR1. It
means there is no change in capital-labour ratio. This signifies that technical progress is neutral.
• Fig 2=Since OR1 is more steep than OR, the K/L has increased. At R2, the K/L is the same as at R
but there is less use of labour than at R. Even at R1, there is less use of labour than at R. It is,
therefore, clear that technical progress is of the nature of labour-saving and it raises K/L.
• Fig 3= The technical progress shifts equilibrium from R to R1. K/L is lower at R1 than at R because
the slope of the line OR1 is less than that of OR. If K/L remains constant, 100 units of A can be
produced at R2 where less input of capital is employed than at R. Even at R], there is less use of
capital than at R. It signifies the technical progress is capital-saving or labour-using.

9. This analysis is attempted on the basis of the
following assumptions
• The home country experiences growth on account of technical progress.
• This country produces two commodities X and Y.
• X is a labour-intensive but Y is a capital- intensive commodity.
• The production functions related to two commodities are linear homogenous.
• The level of output of each commodity is expressed through its respective isoquant.
• The isoquants can cut only once.
• There is no change in the supplies of factors.
• The factors of production are mobile.
• There are the conditions of perfect competition in the economy.

10. Thank you