CHAPTER 11
ECONOMIC GROWTH AND INTERNATIONAL TRADE
A. Essay Questions
1. In recent decades, trade has been growing faster than income for many countries. What combination of trade effects is sufficient for this to come about? Is this behavior consistent with the Rybczynski theorem? Under what circumstances?
Answer: If trade is growing more rapidly than national income, then YEM > 1.0 and there is a protrade or ultra-protrade net effect. The conclusion that growth in one factor leads to an absolute expansion in the product that uses that factor intensively and an absolute contraction in output of the product that uses the other factor intensively is referred to as the Rybczynski theorem.
Difficulty: 03 Hard
Topic: Classifying the Trade Effects of Economic Growth
Topic: Factor Growth, Trade, and Welfare in the Small-Country Case
AACSB: Analytical Thinking
Blooms: Analyze
Learning Objective: 11-01
Learning Objective: 11-03
2. Why is it difficult to analyze the welfare implications of growth in the neoclassical model? What proxy is often used to reach a conclusion about the effects of growth? What leads to the conclusion that, if welfare is to improve with growth in the labor force, there must be accompanying growth in the capital stock and/or improvements in labor productivity?
Answer: If there is growth in the labor force, the welfare implications of growth are somewhat uncertain. The community indifference curve map that existed prior to growth is no longer relevant, because the new members of the labor force may have different tastes than the original members. In practice, economists use levels of per capita income to approximate changes in country welfare.
Difficulty: 02 Medium
Topic: Factor Growth, Trade, and Welfare in the Small-Country Case
AACSB: Analytical Thinking
Blooms: Understand
Learning Objective: 11-03
3. Is it possible that growth in the scarce factor can actually lead to expanded trade in the small-country case? Under what circumstances?
Answer: Scarce factor growth in the small country case has an ultra-antitrade production effect.
Difficulty: 03 Hard
Topic: Factor Growth, Trade, and Welfare in the Small-Country Case
AACSB: Analytical Thinking
Blooms: Analyze
Learning Objective: 11-03
4. Developing countries often claim that growth and trade have left them no better off or perhaps worse off. How might you explain this result theoretically? Could this result obtain if the countries tended to be relatively small? Why or why not?
Answer: Adverse terms of trade effects can occur. Although most developing countries are not large in an overall economic sense, many are sufficiently important suppliers of individual primary commodities to be able to influence world prices.
Difficulty: 02 Medium
Topic: Growth and the Terms of Trade: A Developing-Country Perspective
AACSB: Analytical Thinking
Blooms: Understand
Learning Objective: 11-05
5. It is likely that a protrade production growth effect will lead to an expansion of trade since the presence of inferior goods is relatively rare. Explain.
Answer: The rarity of inferior goods makes it likely that a protrade production growth effect will lead to an expansion of trade.
Difficulty: 02 Medium
Topic: Classifying the Trade Effects of Economic Growth
AACSB: Analytical Thinking
Blooms: Understand
Learning Objective: 11-01
6. (a) Define the five types of “production effects” of economic growth in a country and the
five types of “consumption effects” of the economic growth. Then define the types of
possible “overall” or “net” effects of the country’s growth on the relative importance of
the trade sector.
(b) Developing countries are often concerned that their terms of trade might deteriorate
as economic growth occurs. In terms of the analysis of part (a) of this question, other things equal, what type(s) of growth must occur and what type of country (“large” or “small”) must a developing country be in order for the country’s terms of trade to deteriorate as the country grows? Explain.
Answer: (a) The five types of production effects are: ultra-antitrade production effect, antitrade production, neutral production effect, protrade production effect, ultra-protrade production effect. The five types of consumption effects are: ultra-antitrade consumption effect, antitrade consumption, neutral consumption effect, protrade consumption effect, ultra-protrade consumption effect. (b) A deteriorating TOT for a developing country obtains when it is an important supplier of an individual primary commodity. A protrade production effect will cause this.
Difficulty: 03 Hard
Topic: Classifying the Trade Effects of Economic Growth
Topic: Growth and the Terms of Trade: A Developing-Country Perspective
AACSB: Analytical Thinking
Blooms: Analyze
Learning Objective: 11-01
Learning Objective: 11-05
7. (a) State the Rybczynski theorem. Then, in a two-factor, two-good Heckscher-Ohlin context, illustrate and explain the “production effect” of growth in the labor force in a
relatively capital-abundant country, other things equal.
(b) In the situation of the labor force growth in part (a) above, suppose that the country is a “large” country. Define the meaning of a “large” country in international
trade. Then, and assuming that the “net” or “overall” effect of the labor force growth in
part (a) is of the same type as the “production effect,” illustrate and explain, other things
equal, the impact of that labor force growth on the country’s willingness to trade and the
country’s terms of trade.
(c) Finally, define “immiserizing growth.” Then very briefly explain how “immiserizing growth” could or could not happen in the situation of part (b) above.
Answer: (a) The conclusion that growth in one factor leads to an absolute expansion in the product that uses that factor intensively and an absolute contraction in output of the product that uses the other factor intensively is referred to as the Rybczynski theorem. The “production effect” of labor force growth in a capital-abundant country is ultra-antitrade. (b) A large country is one that can influence relative world prices. (c) When negative terms-of-trade effects outweigh positive growth effects, the situation is referred to as immiserizing growth.
Difficulty: 03 Hard
Topic: Factor Growth, Trade, and Welfare in the Small-Country Case
Topic: Growth, Trade, and Welfare: the Large-Country Case
AACSB: Analytical Thinking
Blooms: Analyze
Learning Objective: 11-03
Learning Objective: 11-04
8. (a) Define the five types of “production effects” of economic growth in a country. Other
things equal, if one factor of production in a country (either labor or capital) grows, what
are the only two types of production effects that are possible because of the growth in this
factor? Briefly explain.
(b) Define the five types of “consumption effects” of economic growth in a country?
Why can economists usually rule out two of these types when discussing likely
possibilities in the “real-world” growth of countries?
(c) Define the five types of possible “net” or “overall” effects of the country’s growth on
the importance of the trade sector and indicate which types would, other things equal,
lead to a deterioration of the growing country’s terms of trade (assuming that the country
is a “large” country).
Answer: (a) The five types of production effects are: ultra-antitrade production effect, antitrade production, neutral production effect, protrade production effect, ultra-protrade production effect. The ultra-antitrade and ultra-protrade production effects can usually be ruled out. (b) The five types of consumption effects are: ultra-antitrade consumption effect, antitrade consumption, neutral consumption effect, protrade consumption effect, ultra-protrade consumption effect. Inferior goods are rare. (c) As a general rule, if both the production effect and the consumption effect are of the same type (e.g., both “protrade”), then the net or overall effect will be of the same type as the two individual effects. If one effect is protrade (antitrade) and the other is neutral, the net effect will be protrade (antitrade).
Difficulty: 02 Medium
Topic: Classifying the Trade Effects of Economic Growth
Topic: Growth, Trade, and Welfare: the Large-Country Case
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 11-01
Learning Objective: 11-04
B. Multiple-Choice Questions
9. In the analysis of growth and trade, if a country’s national income growth leads to an absolute increase in imports but to a slower relative growth in imports than in national income, this growth pattern is called __________ growth.
a. antitrade biased
b. protrade biased
c. ultra-antitrade biased
d. neutral
Answer: a
Difficulty: 01 Easy
Topic: Classifying the Trade Effects of Economic Growth
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 11-01
10. Assuming a two-country world, suppose that country I’s income elasticity of demand for
imports is 1.2 and that country II’s income elasticity of demand for imports is 0.9.
Suppose also that, during 2015, country I’s GDP grows by 5 percent and country II’s GDP grows by 6 percent. Given these income elasticities of demand for imports and
these growth rates and with other things equal, the terms of trade of country I with
country II during 2015 would __________.
a. improve
b. remain the same as before the growth in the two countries took place
c. deteriorate
d. improve, remain the same as before the growth in the two countries took place, or
deteriorate – cannot be determined without more information
Answer: c
Difficulty: 02 Medium
Topic: Classifying the Trade Effects of Economic Growth
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 11-01
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