Session 7

Growth and Trade

Balanced Versus Biased Growth

Single Factor Growth

Correct× Incorrect

Rationale behind Single Factor Growth

Effect on the Country’s Terms of Trade

1. Small Country

1. Large Country

The size of trade cannot influence the world price.

The size of trade can influence the world price.

Small Country

Equal

Trade Line

S1Slope =1

C1

International prices are not influenced by trade.

S1

C1

S2

C2

Large CountryInternational prices are influenced by trade.

Wheat are highly demandedin the world market.

Kopi Luwak

0.5 K.G. = 10,000 Bath (approx)

Wheat are not highly demandedin the world market.

What is the main difference between the consumption of these products ?

It is possible that expanding a country’s abilityto make the products that it exports can actuallymake the country worse off.

Rate of Return

Technology and TradeNew technology is difficult to keep secret, and other

countries have an incentive to obtain the technologyimprovement.

German The U.S. Japan

The innovating country is initially the exporter ofnew product, but it eventually becomes an importer.

The U.S.

Exporter (Pass)

Importer (Present)

First Color Television

With Technology diffusion, openness to trade affects growthIf a country closes itself to international trade,

it probably also cut itself from new technology.This then make the country grow more slowly.