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Trade Theories and Development Experience

Presentation by:

Arghya Das(14PGP005)

Garima(14PGP018)

Pranav Kumar(14PGP031)

Sounak Shah(14PGP044)

Praveen(14PGP056)

Indian Institute of Management Raipur

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International trade and finance

Throughout Asia, Africa, Middle East and Latin America, Exports have traditionally amounted to a sizeable proportion of GNPs of nations

25% or more GNP from Agriculture and primary products in some small countries

Risk and uncertainties in non-mineral primary product exports due to unstable markets

At least 35 LDCs received at least 2/5th of their Export earnings from 1 or 2 agricultural or mineral products

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High

import to

fuel industrial expansion

Increasing Current

Accoun

t deficit

Depletion of Internationa

l Monetar

y Reserves

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5 Basic Questions about Trade and development

How does International trade affect the rate, structure and character of LDC economic growth?How does trade alter the distribution of income and wealth within a country and among different countries?Under what conditions can trade help LDCs achieve their development objectives?

Can LDCs by their own actions determine how much they trade?

Should LDCs adopt an outward-looking policy or and inward-looking policy or a combination of both?

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Importance of Exports

Developing countries generally more dependent on trade than developing countries

Large countries with relatively closed economies less dependent, Ex. India

Exports of LDCs much less diversified than developed countries

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Demand Elasticities

Primary products mainly from developing countries: Income Elasticity of Demand Low

Manufactured goods mainly from developed countries: Income Elasticity of Demand High

Item Income elasticity of Demand

Foodstuff 0.6

Agricultural Raw materials

0.5

Petroleum Products 2.4

Manufactures 1.9

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Exports Earnings Instability

Low Income

Elasticity of

Demand

Low Price Elasticity of

Demand

Exports Earning Instability

Relative price of primary products decline over time

Large and volatile price fluctuations due to any shift in demand or supply curves

Terms of trade & Prebisch-Singer thesis

Ratio between the price of typical unit of exports and the price of typical units of import is known as commodity terms of trade.Expressed as Px/Pm where Px & Pm representsexport & import price indexes.There would be a secular decline in terms of trade of primary-commodity exporters due to a combination of low income & price elasticities of demand.This is known as the Prebisch-Singer thesis.

It will result in long term transfer of income from poor to rich countries.

Real Non oil-commodity terms of trade

1987 1992 19971977

40

60

80

100

120

Comparative Advantage

People find it profitable to trade the things they possess in larger quantities relative to their tastes or needs in return for things they

want more urgently.

Concept of relative cost & price differences is basic to the theory

of international trade.Principle of comparative

advantage states that a country under competitive conditions should specialize in export of

products that it can produce at the lowest relative cost.

Relative factor Endowments

The Neo Classical Model

It enables us to describe analytically the impact of economic growth on trade partners and impact of trade on the structure of national economies and on differential returns to various factors of production.

Factor Endowment Theory

Different products require productive factors in different relative proportion.

Countries have different endowments

of factors of production.

The Traditional Arguments

Trade is an important simulator of economic

growth.

Trade tends to promote greater international and

domestic equality

It helps countries achieve development.

International prices and cost of production

determine how much should a country trade.

For trade, an outward looking international policy is required.

Criticism of Traditional Free Trade TheoryAll productive resources are fixed in quantity.

The technology of production is fixed or same available to every country.

Perfect competition state across countries

No role of national government in international economic relations.

Trade is balanced for each country at all times.

Challenged by North-South trade models

Michael Porter’s Competitive Advantage theory

Vent for Surplus theory

Fixed Resources, Full Employment, and the International Immobility of Capital and Skilled Labor

The Vent-for-Surplus Theory of Trade in LDCs

Fixed, Freely Available Technology and Consumer Sovereignty

Challenged by the Product Cycle theory

Development of synthetic substitutes for developing country exports

International Factor Mobility, Perfect Competition, and Uncertainty: Increasing Returns, Imperfect Competition, and Issues in Specialization

Structural realities in developing countries

Increasing returns and exercise of monopolistic control over world markets

Risk and uncertainty inherent in international trading arrangements

The Critique of Traditional Free-Trade Theory in the Context of Developing-Country Experience

Definite role for State

Industrial policy is crafted by governments

Commercial policies instruments (tariffs, quotas) are state constructs

International policies can result in uneven distribution of gains from trade

The Absence of National Governments in Trading Relations

Balanced Trade and International Price Adjustments

Unrealistic (example: impact of oil price hikes of the 1970s)

Balance of payments deficit & depletion of foreign reserves was major cause of concern for all nations rich & poor.

For non oil producing country declining trade & sluggish demand for export led to trade deficit.

Trade gains accruing to nationals

Enclave economies in developing countries are promoted by trade

Difference between GDP and GNI becomes important

Some Conclusions on Trade Theory and Economic Development Strategy

Trade can lead to rapid economic growth under some circumstances

Trade seems to reinforce existing income inequalities

Trade can benefit LDCs if they can extract trade concessions from developed countries

LDCs generally must trade

Regional cooperation may help LDCs

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