University:
California State University, Northridge
Course:
ECON 405 | International Trade
Academic year:

2024
Views:

337

Pages:

22
Author:

Zara Fuller

Topic 3 The Standard Trade Model Part 2 The Effects of Economic Growth • Is economic growth in China good for the standard of living in the U.S.? • Is growth in a country more or less valuable when it when it is closely integrated in the world economy? • The standard trade model gives us precise answers to these questions. The Effects of Economic Growth (cont.) • Common sense: Growth in NIE may be good for U.S. because this expands our potential export market. • However, it may also mean that NIE will begin to compete with our exporters. ♦ As ↑K* and ↑education* → NIE may begin producing computers and software. • Growth at home is also controversial: growth means we can produce more goods and sell them abroad. Yet, benefits of growth may be passed onto foreigners if ↑supply of U.S. goods → ↓PX. The Effects of Economic Growth (cont.) • Growth is usually biased: it occurs in one sector more than others, causing ∆RS. ♦ E.g., Rapid growth has occurred in U.S. computer industries but relatively little growth has occurred in U.S. textile industries. ♦ Ricardian model: technological progress in one sector causes biased growth. ♦ H-O model: ↑S of 1 factor of production (e.g., ↑K) causes biased growth in the sector that uses K intensively. Fig. 6: Biased Growth The Effects of Economic Growth (cont.) • Biased growth and the resulting ∆RS causes a ∆tot. ♦ Biased growth in the cloth industry (in either home or foreign) will ↓PC/PF and ↓tot for cloth exporters. ♦ Biased growth in the food industry (in either home or foreign) will ↑PC/PF and ↑tot for cloth exporters. ♦ Assume that home exports cloth and imports food. Fig. 7a: Growth and Relative Supply If either country experiences growth biased toward cloth → RS shifts out on world markets → ↓tot and ↑tot*. Fig. 7b: Growth and Relative Supply If either country experiences growth biased toward food → RS curve shifts in on world markets → ↑tot and ↓tot*. The Effects of Economic Growth (cont.) • Export-biased growth is growth that expands a country’s PPF disproportionately toward that country’s export sector. ♦ Biased growth in the food industry in foreign is export-biased growth for foreign. • Import-biased growth is growth that expands a country’s PPF disproportionately toward that country’s import sector. ♦ Biased growth in the cloth industry in foreign is import-biased growth for foreign. The Effects of Economic Growth (cont.) • Export-biased growth tends to worsen a growing country’s tot to the benefit of foreign countries. • Import-biased growth tends to improve a growing country’s tot at the expense of foreign countries. Fig. 8a: Export-biased Growth r QY Overall, welfare is depressed by ↓tot (I2 < I1). However, the ↓tot has not cancelled out all of the benefits of growth (i.e., ↑prod capacity) as I2 > I0. D1 D2 I1 I2 See handout on “Growth and Welfare” for further explanation. D0 I0 Q2 Q0 Q1 P0 0 P0,1 QX P2 r Fig. 8b: Import-biased Growth D2 QY Overall, welfare increased because of the ↑prod capacity (I1 > I0) and the ↑tot (I2 > I1). I2 D1 I1 D0 See handout on “Growth and Welfare” for further explanation. Q1 I0 Q2 Q0 P2 0 P0 P0,1 QX Has Growth in Asia Reduced the Welfare of High Income Countries? • Standard trade model predicts that import biased growth in China ↓tot in U.S. and ↓our standard of living. ♦ Import biased growth for China would occur in sectors that compete with U.S. exports. • But this prediction is not supported by data: should see ↓tot for U.S. and other high income countries. ♦ In fact, ↑tot for high income countries and ↓tot* for developing Asian countries. Table 1: Average Annual Percent Changes in Terms of Trade NIE have experienced export-biased growth which has ↓tot*. E.g., China’s export volume grew by 14% per year from 1992 to 2002. Thus, China’s ↓tot by 13% which shaved 3% off of China’s growth in real income. China’s exports of L-intensive manufactured goods ↑tot in U.S., but ↓tot in Mexico (because they export similar products). Between 1998 and 2003, Chinese-manufactured X to U.S. grew by 15.2% per year which was 2.5X as fast as Mexico’s exports. The Effects of International Transfers of Income • Transfers of income sometimes occur from one country to another. ♦ War reparations or foreign aid may influence demand of traded goods and therefore RD. ♦ International loans may also influence RD in SR, before the loan is paid back. • How do transfers of income across countries affect RD and tot? The Effects of International Transfers of Income (cont.) • Income (Y) transferred from home to foreign → ↓Y and ↑Y*, which may shift RD curve. ♦ Note: RS does not shift as long as only money is transferred. • If ↑Y* → proportionate ↑D*C and ↑D*F is matched by ↓Y → ↓DC and ↓DF → RD does not shift and tot are unaffected! • However, if spending patterns differ between the 2 countries → RD shifts and ∆tot. The Effects of International Transfers of Income (cont.) • If home has a higher marginal propensity to spend on cloth than foreign does → at fixed PC/PF, ↓Y → ↓RD for cloth. ♦ In this case (Fig. 9), an income transfer from home causes ↓tot and ↑tot*. • Alternatively, if home has a lower marginal propensity to spend on cloth than foreign does → transfer of income to foreign → ↑RD for cloth → ↑tot and ↓tot*. ♦ In this case, RD curve would shift outward. Fig. 9: One Possible Effect of a Transfer on the Terms of Trade The RD curve will only shift inward when home transfers income to foreign, if home has a higher marginal propensity to spend on cloth than foreign does. The Effects of International Transfers of Income (cont.) • Rule: a transfer worsens the donor’s tot if the donor has a higher marginal propensity to spend on its export good than the recipient. • In reality: when examining countries’ spending patterns, each has a preference for its own goods. ♦ E.g., In U.S., imports are only 15% of national income. So we spend 85% of our income on domestically produced goods. ♦ ROW spends 9% of its income on U.S. goods. The Effects of International Transfers of Income (cont.) • Data suggests that if U.S. transferred income to ROW → ↓RD for U.S. goods → ↓tot. • We spend income at home because of natural and artificial barriers to trade. ♦ Non-traded goods ensure that the majority of our income is spent on domestic goods (e.g., housing, education, and medical services). The Effects of International Transfers of Income (cont.) • Non-traded and export sectors compete for resources. • If U.S. transfers income abroad → ↓D for nontraded goods → releases factors to work in export sector → ↑X → ↓tot. ♦ Recipient’s ↑income → ↑D for non-traded goods → factors move from export to the non-traded goods sector → ↓X* and ↑tot*. The Effects of International Transfers of Income (cont.) • In 1998, several Asian countries were in crisis as investor confidence collapsed in 1997. • Countries like South Korea and Thailand saw a sudden reversal of international K flows. • Foreign banks that had been lending heavily to these countries, now stopped lending and demanded that the existing loans be repaid. • These countries quickly went from receiving large transfers to making large transfers! • As predicted, these countries experienced ↓tot which exacerbated the financial crisis.

The Standard Trade Model, Part 2

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