International trade and Economic Development

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International trade and Economic Development
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Does Trade Lead to development?

• LEDCs are generally open economies
• Large proportion of national output relates to
  imports and exports
• Output and employment levels are hence highly
  dependent on export performance.
• Also the import of machinery and equipment play a
  large role in their economic development.

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Some quick definitions

• Free trade represents trade between countries
  without the introduction of artificial barriers
• International trade reflects exchange and
  specialisation

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Exchange

• Exchange countries supply goods and services
  that they can produce relatively cheaply and buy
  products from other countries that they would
  find relatively expensive to produce

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• Specialisation benefits from trade are increased
  if there are economies of scale from production
  and if countries specialise their resources in
  producing certain commodities

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• There are mutual benefits from specialisation and
  exchange between countries leading to a rise in
  economic welfare

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Comparative advantage David Ricardo

• Comparative advantage exists when for a country
• The relative opportunity cost of production is
  lower than in another country
• A country is relatively more productively
  efficient than another
• Therefore both trading partners would benefit
  from the trade relationship.

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Definitions

• Absolute Advantage
• A country has an absolute advantage over its
  trading partners if it is able to produce more of
  a good or service using the same amount of
  resources, i.e more efficiently.

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Comparative advantage

• Comparative advantage occurs when a country can
  produce a good with a lower opportunity cost than
  its trading partner.
• Comparative advantage, rather than absolute
  advantage, is useful in determining what should
  be produced and what should be acquired though
  trade.

France has a comparative advantage in nuts its
PPF has a flatter slope on the nuts axis
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The concept was developed further by Heckscher
and Ohlin (two Swedish economists)

• Countries have different factor endowments
• Countries will tend to specialise in and then
  export products which use intensively the factors
  which it is best endowed
• Exports used to finance imports of other products

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Assumptions

• Factor of production are assumed to be mobile
• Occupational mobility of capital and labour
• Geographical mobility of labour

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• Transportation costs ignored or assumed to be
  insignificant
• Economies of scale the standard theory of trade
  assumes constant returns to scale welfare gains
  may be greater if there are increasing returns
• Ignores production and consumption externalities
  arising from trade
• All countries can benefit from specialisation