International Economics Prof. D. Sunitha Raju Economic Trade & Growth

International Economics

Prof. D. Sunitha Raju

Economic Trade & Growth


Economic Growth & Trade

1. What is Economic Growth Outward shift in the Production Possibility

Frontier

2. Sources of Growth Increase in the quantities of resources Technical progress Factor Mobility


Economic Growth & Trade

1. Growth of Factors of Production (more inputs)

a) More labour and capital : Balanced growth

b) More labour or more capital : Unbalanced growth

Causes outward shifts in production frontier


Balanced Growth in Labor and Capital

20

40

6070

140

050 14

0130

260 280 X

Y

AB

B’·

·

·


Balanced Growth & Welfare

(a) Income effect : Growth’s effect on per capita consumption

(b) Terms of Trade : Changes in relative output prices


How Does Balanced Growth Affect Welfare?Small-Country Case Large-Country Case

Effect on growing economy

Income effect 0 if population ↑

+ if labor-force ↑

if population ↑


Terms-of-trade-effect 0 -if export-expanding

+ if import-replacing

Change in export price 0 ↓

Change in import price 0 ↑

Net effect on per-capita consumption

0 if population ↑


Depends on magnitudes of income and terms-of-trade effects

Effect on trading partner:

Income effect 0 0

Terms-of-trade effect 0 +

Change in export price 0 ↑

Change in import price 0 ↓


0 +


Growth in only Labor or Capital

X

Y

A

B

130

8070

140 150 2750

·

·


Labor Growth & Welfare

Small-Country Case Large-Country Case


Income effect -if population ;

+ if labor-force

if population ;

+ if labor-force




-if population ;

+ if labor-force

Depends on signs and magnitudes of income and terms-of-trade effects

Effect on trading partner

Income effect

Terms-of-trade effect

0

0

0

+ if export-expanding;

-if import-replacing


0 + if export-expanding



Capital Growth & Welfare

Small-Country Case Large-Country Case


Income effect + +




+ Depends on signs and magnitudes of income and terms-of-trade effects

Effect on trading partner

Income effect

Terms-of-trade effect

0

0

0

+ if export-expanding;



0 + if export-expanding



Economic Growth : More Productivity

(a) Types of Technical Progress• Neutral technical progress• Capital saving technical progress• Labour saving technical progress

(b) Productivity and Welfare


2. Technical Progress

• Causes the production frontier to shift outward

• Shift depends on the type and rate of technical progress

• Neutral technical progress leads to expansion of the production of all goods at the same rate


Growth & Trade

• Growth in output of a country’s exportables & importables

• Shifts in Consumption pattern

• National income growth

Terms of Trade Implication


Factor Mobility

a) Motives for Capital Flows

i. Portfolio Investment• To earn higher return• Risk diversification

ii. Direct Foreign Investment• Horizontal integration• Vertical integration• To avoid tariff or other restriction• To take advantage of subsidies


Factor Mobility

b) Motives for Labour Mobility

i. Economic factors

• Higher wages

• Cost of moving

ii. Non economic factors

• Economic freedom

• Religions or [political freedom


F

J

WA

OA OB

VMPAL

•

••

•

•

•

•

E

H

VMPBL

•

WB

•••

•

••

•

WB1

•WA1

WA0

WB0

G

L0 L1

Native labor in AMigration from B to A

What Are the Effects of Labor Mobility?


Effects of Labour Migration from Country B to Country A

Effect on:

Capital owners in A +

Native labour in A -

Immigrants +

Net effect on A +(area EGL1L0)

Capital owners in B -

Labour remaining in B +

Net effect on B -(area EGL1L0)

Net effect on world +(area EGJ)


Immigration to the United States by Top Source Countries, Fiscal Year 2002

Country Immigrants (Thousands)

Mexico 219.4

India 71.1

China 61.3

Philippines 51.3

Vietnam 33.6

Source: Data from U.S. Bureau of Citizenship and Immigration Services (at http://www.uscis.gov).


Capital Mobility : Motives

i. Portfolio Investment• To earn higher return• Risk diversification

ii. Direct Foreign Investment• Horizontal integration• Vertical integration• To avoid tariff or other restriction• To take advantage of subsidies


F

J

RA

OA OB

VMPAK

•

••

•

•

•

•

E

H

VMPBK

•

RB

•••

•

••

•RB

1

•RA1

RA0

RB0

G

K0 K1

What Are the Effects of Capital Mobility?


Effects of Capital Flow from Country B to Country A

Effect on:

Owners of native capital in A _

Labourers in A +

Net effect on A +(area EGF)

Owners of capital remaining in B

+

Labourers in B _

Owners of migrant capital +

Net effect on B +(area FGJ)

Net effect on world welfare +(area EGJ)


Selected indicators of FDI and International Production 1982-2006

Item Value at current prices

(Billions of dollars)

Annual growth rate

(Per cent)

1982 1990 2005 2006 1986-90 1991-95 1996-2000

FDI inflows 59 202 946 1,306 21.7 22.0 40.0

FDI outflows 28 230 837 1,216 24.6 17.3 36.4

Inward FDI stock 637 1,779 10,048 11,999 16.9 9.4 17.4

Outward FDI stock 627 1,815 10,579 12,474 17.7 10.6 17.3

Income on inward FDI 47 76 759 881 10.4 29.2 16.3

Income on outward FDI 46 120 845 972 18.7 17.4 11.8

Cross-border M&Asa _ 151 716 880 25.9b 24.0 51.5

Sales of foreign affiliates 2,741 6,126 21,394c 25,177c

19.3 8.8 8.4

Gross product of foreign affiliates 676 1,501 4,184d 4,862 17.0 6.7 7.3

Total assets of foreign affiliates 2,206 6,036 42,637e 51,187 17.7 13.7 F19.3

Exports of foreign affiliates 688 1,523 4,197f 4,707f 21.7 8.5 3.3

Employment of foreign affiliates (in thousands)

21,524 25,103 63,770g 72,627g

5.3 5.5 11.5

Source: UNCTAD, based on the FDI/TNC database (www.unctad.org/fdi stastics), UNCTAD GlobStat database, and IMF, 2007b


FDI Inflows, Global and By Groups of Economies, 1980-2004


Developing Countries: Total Resource Flows


1999 2000 2001 2002 2003

Angola 2471 879 2146 1643 1415

South Africa 1502 888 6789 757 762

Egypt 1065 1235 510 647 NA

Nigeria 1005 930 1104 1281 1200

Morocco 850 NA 2825 481 2279

Tanzania 542 282 467 NA NA

Algeria 507 438 1196 NA NA

Sudan 371 392 574 713 1349

Top Recipients of FDI in Africa, 1999-2003(Million US$)


FDI Inflows to African Fuel and Mineral-Exporting Countries Compared to Other Africa, 1970 and

2003


U.S. Direct Investment Abroad Foreign Direct Investment in U.S.

Country Amount(Billions of Dollars)

Percentage Amount(Billions of

Dollars)

Percentage

Canada 18.3 13.1 100.8 8.1

Europe 76.9 55.2 890.6 71.9

Latin America 19.9 14.3 42.7 3.5

Africa 1.1 0.7 2.1 0.1

Middle East 1.9 1.4 8.4 0.7

Asia and Pacific

21.2 15.3 194.0 15.7

139.3 100.0 1238.6 100.0

Direct Investment Position of the United States, 2000


1995 1996 1997 1998 1999 2000 2001 2002 2003

Angola FDI inflowsGreenfield FDI inflows

Profit remittances

472472386

181181536

412412559

11141114

378

24712471

653

879879929

21452126

927

167216721100

141514151700

Congo, Rep.

FDI inflowsGreenfield FDI inflows

Profit remittances

12564

326

7359

458

797999

3333

-77

538537181

166166466

7777

369

331331572

201201378

Egypt FDI inflowsGreenfield FDI inflows

Profit remittances

598588228

636465

34

891789113

10761028

134

1065327100

1235707

92

510-150

28

647312

89

237-1963

47

Morocco FDI inflowsGreenfield FDI inflows

Profit remittances

332332101

322282116

1188610160

417412143

137612531286

423423268

2808597401

481434482

2279655594

Total FDI, Greenfield FDI Inflows and Profit Remittances, Selected Countries, 1995-2003

(Million Dollars )

Contd.:-


Nigeria FDI inflowsGreenfield FDI inflowsProfit remittances

1079

1079

1330

1593

1593

1598

1539

1539

1477

1051

1039

1427

1005

987162

1

930915183

2

1104

1103

802

12811281

984

120012001316

Sudan FDI inflowsGreenfield FDI inflowsProfit remittances

000

000

9898…

371371

…

392392

…

574574

…

713688633

1349531

386824941164

Tanzania, Utd. Rep.

FDI inflowsGreenfield FDI inflowsProfit remittances

120118

2

150133

2

158156

3

172149

8

517517

17

4634813

327207

1

240240

2

248246

2

Contd……


Multinational Corporation

a) Demand Factors Overseas subsidiaries to tap foreign market

demand Market competition

b) Cost Factors Labor costs Transportation costs Government policies

International Economics Rank Company Home Nation Industry Yearly

Sales(billion $)

Percentage of Foreign Sales

1 Exxon Mobil Corporation United States Petroleum 206.1 69.4

2 General Motors United States Motor vehicles 184.4 26.1

3 Ford Motor Company United States Motor vehicles 170.1 30.4

4 Daimler Chrysler Germany/US Motor vehicles 152.4 32.0

5 Royal Dutch/Shell Group UK/Netherlands Petroleum 149.1 54.4

6 British Petroleum UK Petroleum 148.1 71.3

7 General Electric United States Electronics 129.9 38.1

8 Toyota Japan Motor vehicles 125.6 49.6

9 Chevron Texaco United States Petroleum 117.1 55.5

10 Total Fina Elf France Petroleum 105.8 78.0

11 IBM United States Computers 88.4 57.9

12 Volkswagen Group Germany Motor vehicles 79.6 72.6

The World’s Largest Industrial Multinational Corporations in 2000

Contd.:-


13 Hitachi Japan Electronics 75.5 29.3

14 Siemens Germany Electronics 71.4 43.8

15 Matsushita Electric Japan Electronics 68.9 49.3

16 Sony Japan Electronics 63.7 67.2

17 Honda Motor Japan Motor vehicles 57.5 72.9

18 Fiat Italy Motor vehicles 53.6 66.9

19 Petroleos de Venezuela

Venezuela Petroleum 53.2 93.5

Contd…


Multinational Corporation

a) Direct Exporting vs FDI Foreign market size is large, FDI is profitable Foreign market size is small, direct export is

profitable

Documents

International Economics Prof. D. Sunitha Raju Economic Trade & Growth