DEVELOPMENT ECONOMICS
Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,
Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest
Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest
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Author: Katalin Szilágyi Supervised by Katalin Szilágyi
January 2011
Week 9
International trade Questions
What are the stylized facts of international trade
• Which theories can make sense of observed patterns?
• Is free international trade beneficial for a country?
Stylized facts
• Surge in international trade flows after WWII
• Solid economic growth
• Bretton Woods: GATT
• 60–68: +7,3% (annual volume growth)
• 68–73: +9,7%
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• 73–81: +3,3%
• 80–85: +2,3%
• 85–90: +4,5%
• Developing world: trade is rising, too
• More hit by oil price increases
• Heterogenity
• Asia is exceptional (annual average ~10%)
• ”4 Tigers”: ~13%
• Latin America: trade volumes grow following debt crises
• Africa: performance is worse
Stylized facts: growth
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Stylized facts: composition
• Developed countries gain in share
• 1960: 66%
• 1991: 73%
• 1980– 007: falling commodity prices
• Developing countries are commodity exporters
• Structure of exports changes for them, too
• Share of developing countries in manufacturing exports is on the rise
• Early 90s: ~ 20%
Structure of exports
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Primary exports and income
Manufactured exports
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Primary imports and income
Comparative advantage: the Ricardian model
• Illustration:
• 2 countries: N, S
• 1 input to production: L – labor
• 2 goods: computer, rice
country labor / 1 computer
labor / 1 rice
computer / rice labor
N 10 15 2/3 600
S 40 20 2 600
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Comparative advantage
• Autarchy or openness?
• Openness implies more possibilities
• Independent of absolute advantages
• Openness is beneficial for all countries
• Just one input to production → no re-distribution of income within country
Sources of comparative advantage
• Factor endowment: a developing country is better endowed with labor or primary commodities → Heckscher–Ohlin model
• Technology: different goods require different methods (technology), some more advantageous for developing countries
• Preferences: demand curves may be different
• Income, traditions, necessities may diverge
• Economies to scale
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Heckscher–Ohlin
• Illustration:
• 2 countries: N, S
• 2 inputs to production: L – labor, K – capital
• N is relatively better endowed with capital.
• 2 goods: computer and rice
• Computers are capital-intensive.
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Heckscher–Ohlin: Implications
• Developing countries are relatively better endowed with labor and natural resources
• Developing countries will export labor-intensive goods and primary commodities
• Developed countries will export capital-intensive goods
• International trade between developed and developing countries is trade in factors of production
Heckscher-Ohlin
• Leontief-paradox
• (USA, 1953)
• Imports are more capital-intensive
• explanation?
– human capital – labor productivity
USA 1962 Import Export
Capital share in
$ 1m
$ 2.13m $ 1.88m
Labor share in $ 1m
119 131 fő
Capital / labor $ 17.900 $ 14.300
Average formation of labor (years)
9.9 10.1
Share of researchers / engineers
0.0189 0.0255
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Preferences
• In Hecksher–Ohlin, trade is mostly between developed and developing
• Differences in preferences can mitigate this effect
• (H-O): developing countries have an advantage in producing food → food will be cheaper there
• (pref.): food consists of a higher share in the consumer’s basket → food will be more expensive there
• Taste for variety can motivate international trade
• Beer, cars, clothes
Economies to scale
• Assume two identical countries
• Assume average costs are decreasing with volume
• It is worth specialising to one (a limited number) of products, and import the rest
• Economies to scale → monopolistic market structure
Summary
• All theories imply that trade is beneficial to all countries
• Trade barriers
• No strong correlation with growth
• Within-country wealth effects are unclear
• Need to examine trade policies
