Economic Growth and

International Trade
Chayun Tantivasadakarn
Faculty of Economics, Thammasat University
1
Chayun Tanti
Outline
Classifying the Trade Effects of
Economic Growth
Sources of Growth and the Production-
Possibilities Frontier
Factor Growth, Trade and Welfare
The Small-Country Case and the
Rybczynski Theorem
The Large-Country Case
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Neutral
production
growth
The trade effects of production growth
Y
X
A
P
Y
X
A
P
B
Import
Export
Assuming a small country, the world relative price, P, is constant.
This country exports X and imports Y.
I protrade
II ultra-protrade
III
antitrade
IV
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The trade effects of production growth
Neutral production effect: production of export and import
good grow at the same rate.
I. Protrade production effect: production of export good
grows faster than the production of import good.
II. Ultra-protrade production effect: production of export
good grows while the production of import good shrinks.
III. Antitrade production effect: production of import good
grows faster than the production of export good.
IV. Ultra-antitrade production effect: production of import
good grows while the production of export good shrinks.
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The trade effects of consumption growth
As income increases, consumption can be in 4
regions.
Neutral consumption
growth
Y
X
A
P
Y
X
B
P
B
Import
Export
I antitrade
II ultra-antitrade
III
IV
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The trade effects of consumption growth
Neutral consumption effect: consumption of export and
import good grow at the same rate.
I. Antitrade consumption effect : consumption of export good
grows faster than the consumption of import good.
II. Ultra-antitrade consumption effect: consumption of export
good grows while the consumption of import good shrinks.
III. Protrade consumption effect: consumption of import good
grows faster than the consumption of export good.
IV. Ultra-protrade consumption effect: production of import
good grows while the consumption of export good shrinks.
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Combine trade effects of economic growth
The over all effects of economic growth on trade
depend on both production and consumption.
If both production and consumption effects are the
same type (e.g., protrade), the net 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).
Other combinations will give various net effects.
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C
/

C
Y
X
A
B
A
/

B
/
Ultra-antitrade production effect
Ultra-antitrade consumption effect
Reduction in trade
C
Y
X
A
B
A
/
C
/

B
/
Protrade production effect
Neutral consumption effect
Expansion of trade
Combine trade effects of economic growth: examples
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Neutral Technical progress: increase the productivity
of L and K in the same proportion; K/L ratio is
unchanged.
Labor-saving technical progress: increase the
productivity K proportionately more than that of L;
K/L ratio rises.
Capital-saving technical progress: increase the
productivity L proportionately more than that of K;
K/L ratio falls.
Sources of Growth: Technical progress
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PPC is shifted out by the improvement of technology.
Commodity-neutral technical progress: the progress affects
both goods equally.
Sources of Growth: Technical progress
Y
X
Y
X
Commodity-
specic technical
progress
Commodity-neutral
technical progress
Commodity-specic technical progress: the progress affects
only one good.
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Sources of Growth: Factors of Production
Balanced growth: L and K grow at the same rate.
PPC is shifted out parallel to the old one.
Only one factor grows: PPC is shifted out biased
toward the good that uses that factor intensively.
Y
X
X
Y
E
P

X
/
Y
/
E
/

P

B
A
Y
X
X
Y E
C
D
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Factor Growth and trade: The Small-Country Case
An increase in L endowment will shift the PPC biased toward the X
(L-intensive good) axis from XY to X
/
Y
/
by Rybczynski Theorem
Y
X
X
Y
X
/
Y
/
E
P

E
/

P

Since P is constant, the
equilibrium moves from E to E
/
.
X production increases while Y
production decreases.
If L is the abundant factor, there is
an ultra-protrade production effect.
If L is the scarce factor, there is
ultra-antitrade production effect.
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If capital grows or there is technical progress, welfare will be
increased since higher output means the country can reach a
higher community indifference curve.
Assuming that the social benets from output increase are not
offset by negative income distribution effects.
If labor force increases, the community indifference curve is
changed since the new labor force may have different tastes.
--> use per capita income to approximate.
By CRTS assumption, output will expand by a smaller percentage
than the increase in the labor force. Per capita income will be
fallen and so is the welfare.
Factor Growth and welfare: The Small-Country Case
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P
1
P
1

P
0

F
H
/
H
C
In the large country case, growth can change the TOT.
Factor Growth and trade: The Large-Country Case
Y
X
A
P
0

B
Y
X (Home exports)
E
(
H
o
m
e

i
m
p
o
r
t
s
)

O
C
B
E
G
I
Assuming a protrade case, Homes offer curve rotates out
from OH to OH
/
, causing the TOT to change to P
1
.
U
0

D
P
0

G
U
2

J
K
U
1

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The deterioration of Homes TOT from P
0
to P
1
after growth
rotates the budget line counter clockwise.
Home produces less of export good X and more of import
good Y (movement from D to J).
The relatively higher price of Y shifts consumption from E
to K.
A reduction in the degree of specialization and trade.
A decrease in welfare compared with the case when TOT is
unchanged (U
2
to U
1
).
An increase in welfare compared with no growth (U
0
to U
1
).
Factor Growth and Welfare: The Large-Country Case
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Immiserizing growth
If the post-growth TOT is declined
sufciently, production move from
D to J and consumption move
from B to K.
Y
X
A
P
0

B
U
0

P
0

E
D
U
2

P
1
J Consumer may attain a lower
welfare compared with the pre-
growth since the indifference
curve is U
1
< U
0
.
K
U
1

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