Trade

Trade

1. World Trading Patterns

   • DC: In general increase since 70w
     • very high in Asia
     • Barely change in SSA
   • IC: increase in international trade (66 to 73% in 1990)
     • decline in primary goods
       • value of export goods rose
   • In general: DC export primary, IC export manufactured goods
     • however shift is occurring
     • Theory of classical trading theory
       • DC export primary goods and import manufactured goods, IC export manufactured and import primary
         • Reality: Import pattern for DC does not follow. IC import primary and export manufactured. Most trade actually among ICs

2. Ricardo (Comparative advantages

   • Assumptions
     • 2 countries, 2 goods
     • both countries same endowment
     • labor is only production factor
     • One country is more productive at producing both
       • Each country will ONLY produce good for which it has RELATIVE advantage --> ONLY relative price matters
         • both will reach higher possibility frontier

3. Heckscher Ohlin

   • Assumptions
     • 2 countries (N and S), 2 goods each (Cars and Textiles)
     • New: Two production factors: Capital and Labor
     • New: Different endowments: N has lots of capital, S has lots of labor
   • Implication
     • Country will export commodities that are intensive in those factors which the the country has in abundance
       • N will produce more cars, S will produce more textiles
         • both countries will produce some of the other good as well
   • HO with different preferences
     • Assumptions
       • Intuition
         • Better explain growth between IC
       • N and S have similar endowments and technologies
         • but different preferences
           • therefore different indifferent curves
           • may derive from different GDP level
             • IC higher preference for capital intense good
     • Implications
       • countries will specialise on the good for which they have lower demand
         • since it has comparative advantage for that good (cheaper price)
           • It the exports this (low demanded) good
             • from revenue imports desired good at lower price

4. Source of comparative advantages

   • Technologies (Ricardo)
   • Factor Endowments (Heckscher Ohlin)
   • Preferences (Heckscher Ohlin)
   • Economies of Scale

5. Common for Ricardo/HO: explain trade between DC and IC since differences in factor endowments and technology can be expected. But fail to explain trade BETWEEN DC

6. Economies of Scale

   • Assumptions
     • two countries w/ same technology, endowments, presences
       • BUT: Difference in economies of scale
         • average costs of production declines with increasing output
           • increasing returns to scale
   • Implication
     • rel. prices in both countries the same therefore only one competitive advantage possible:
       • focus on production of one commodity since production costs then starts to decline
         • can explain trade between IC

7. Exporting primary goods a good strategy for development?

   • PRO
     • If first focus on labor intensive products and THEN capital intensive once FDI IS EASIER TO ATTRACT
     • focus on labor will increase demand for labor
       • higher employment, wages, increase demand
         • growth and development
     • positive spill-over
       • incentive for domestic production & economy-wide growth
     • income from abroad
       • can be invested in infrastructure
   • CONTRA
     • flow to primary sector
       • prevent investment in capital intensive sector
         • transition difficult
     • Engels law
       • As soon as income rises, demand for primary goods will decrease
         • If income in DC increases, demand will lower
           • declining terms of trade
     • declining ToT
       • export of primaries may lead to decrease of value of exports compared to value of imports
       • (Prebish-Singer Hypothesis
     • volatility in commodity prices

8. Trade Policies

   • Prebish Singer Hypothesis
     • DC specialise in food products
       • deterioration of ToT in the long run
         • income elasticities for food lower than 1 (Engles law)
           • therefore DC need to diversify
             • also export manufactured goods
             • protect certain manufacturing sectors via tariffs / quotas
   • Dutch disease
     • boom in export of certain sector with high impact on income
       • inflation and real appreciation of currency
         • all other sectors loose competitiveness
           • rise of unemployment

9. Why protectionism?

   • political reasons
     • lobby groups put pressure on trade policies
   • big countries
     • P. allows impact on demand and world prices
   • Infant industry argument
   • Fiscal revenues
   • inter. agreements

10. Terms of trade

    • Net Barter ToT
      • Pe/Pm
    • Income ToT
      • Pe/Pm * Qe (index of quantities)
      • Change in quantities may compensate for price changes
        • e.g. DC exports large quantities of primary. Prices may be low but compensated by large quantity
    • Single Factor ToT
      • Pe/Pm *Ze
        • changes in quantity not driven by supply & demand but technological change