The following paper relates two of the most important economic phenomena, namely economic growth and international trade. Before analysing the relationship between two economic phenomena in detail, an overview of some of the most prominent empirical empirical studies concerning the relationship between openness to international trade and economic growth in general is provided.
As most of them seem to have reached the conclusion that trade influences growth in a positive way, the question for the reasons of this presumably positive relationship arises. Factors which cause or influence economic growth in general as well as various channels through which trade might have an influence on growth are presented in the third and forth section. The importance of various sources of economic and the Solow-Model and the AK-Model are introduced in order to distinguish between long-run and short-run effects of capital accumulation, learning by doing and R&D on economic growth.
The remaining analysis concentrates on one channel in particular, namely on how
trade determines a country's import and export structure. The importance of the
range of products a country produces is enormous and affects economic growth and welfare. The fifth section introduces the static Ricardian model of comparative advantage in order to show how productivity levels dictate the patterns of trade and determine which products a country produces depending on static productivity levels at the time a country opens up to trade.
Since productivity levels do, however, not remain constant but are influenced by learning by doing and specialisation, dynamic effects of specialisation on comparative advantage should not be neglected. For this purpose, a model of dynamic comparative advantage is introduced in the sixth section. It shows how comparative advantages which exist at the time an economy opens up to trade tend to lock in and determine trade patterns in the long run. The question is raised when an economy should open up to trade and a justification of the infant industry argument is provided on theoretical grounds. The paper is concluded by a welfare analysis, which tries to answer the question under which conditions free trade or protectionist policies are best suited for a country.
Table of Contents
1 Introduction
2 Trade and Economic Growth - The Empirical Relationship
2.1 General Empirical Evidence
3 Sources of Economic Growth
3.1 Capital Accumulation
3.2 Productivity
3.2.1 Solow-Model
3.2.2 Research & Development (R&D) - Endogenous Growth
3.2.3 Learning by Doing
3.2.4 AK-Model
4 Openness in Growth Theory
4.1 Capital Accumulation - Trade and Neoclassical Growth
4.2 Trade and Endogenous Growth
4.2.1 Research and Development (R&D)
4.2.2 Learning by Doing
5 Static Comparative Advantage
5.1 Supply Side
5.1.1 Productivity Levels
5.1.2 Wages
5.2 Demand Side
6 Dynamic Comparative Advantage
6.1 A Model of the Dynamics of Specialisation
6.1.1 Infant Industry Argument
6.1.2 The Static Model
6.1.3 Learning by Doing and Productivity Dynamics- Endogenous comparative advantage
6.1.4 Dynamic analysis
6.1.5 Opening up to trade - Lock-in Effects of Trade Patterns
6.1.6 Expanding the Market Share
6.2 Welfare Analysis
6.2.1 The Static Model
6.2.2 Learning and Productivity Dynamics
6.2.3 Welfare Analysis
6.2.4 Static Welfare in Autarky
6.2.5 Static Welfare in Free Trade
6.2.6 Dynamic Welfare Effects in Autarky
6.2.7 Dynamic Welfare Effects in Free Trade
7 Conclusion
Research Objective and Core Topics
The primary objective of this thesis is to examine the impact of international trade on economic growth, focusing on both welfare effects and the mechanisms of dynamic comparative advantage. The paper seeks to answer how trade integration influences long-term growth paths and whether protectionist or free trade policies are better suited for developing countries under different theoretical frameworks.
- Empirical relationship between economic openness and GDP growth.
- Sources of economic growth (Capital Accumulation, Productivity, R&D, Learning by Doing).
- Mechanisms of static comparative advantage in trade patterns.
- Development of dynamic comparative advantage and the lock-in effects of trade.
- Welfare analysis comparing free trade and autarky scenarios.
Excerpt from the Book
3.2.1 Solow-Model
A more formal analysis will illustrate the aspects outlined in the previous section and introduce the Solow-Model. The Solow-Model is the most widely known growth model and explains growth as the result of capital accumulation, labour and technological progress. Production is described by a simple Cobb-Douglas production function
Y = F(K, AL) = Kα(AL)1−α. (1)
K is the capital stock, L the labour force and A ≻ 0 the level of productivity, which comes as “manna from heaven” and requires no input of production. Each of the variables depends on time t. The level of productivity is modelled as labour-augmenting or “Harrod-neutral”. Another possible Cobb-Douglas function would be Y = AF(K, L), which is called “Hicks-neutral”. The results of the Solow-Model are not influenced no matter which of the two kinds of technology is chosen. The share of capital is denoted by α. Since output depends positively on both capital and labour their exponents must be positive. It follows that α can only take values between zero and one (0 ≺ α ≺ 1). Otherwise 1 − α would be negative. The fact that α ≺ 1 implies decreasing returns to capital and to labour separately but constant returns to scale to all input factors together. The level of productivity A and the labour force L are assumed to grow at the constant exogenous rates g and n:
L(t) = L(0)ent, A(t) = A(0)egt. (2)
Summary of Chapters
1 Introduction: Provides the motivation for studying international trade and economic growth, setting the stage for the paper's focus on welfare and long-term growth.
2 Trade and Economic Growth - The Empirical Relationship: Reviews major empirical studies to demonstrate the generally positive, though complex, relationship between economic openness and growth.
3 Sources of Economic Growth: Explores fundamental growth drivers, including capital accumulation and productivity, using the Solow, R&D, and AK models.
4 Openness in Growth Theory: Analyzes how trade influences growth determinants like capital accumulation and innovation through international knowledge spillovers.
5 Static Comparative Advantage: Explains trade patterns through the classic Ricardian model, focusing on supply and demand factors in a multi-good, two-country environment.
6 Dynamic Comparative Advantage: Discusses how trade specialisation can evolve over time, examining the infant industry argument and welfare outcomes of trade regimes.
7 Conclusion: Synthesizes findings on the role of trade policy, emphasizing that while trade generally aids growth, context-specific factors determine its ultimate impact.
Keywords
International Trade, Economic Growth, Comparative Advantage, Solow Model, Endogenous Growth, Productivity, R&D, Learning by Doing, Infant Industry Argument, Welfare Analysis, Trade Liberalisation, Capital Accumulation, Specialisation, Openness, Trade Patterns
Frequently Asked Questions
What is the fundamental focus of this paper?
The paper examines the relationship between international trade and economic growth, investigating how openness affects welfare and long-term economic development.
What are the primary thematic fields covered?
Key topics include growth theory (neoclassical and endogenous), empirical evidence on trade openness, sources of growth like capital and productivity, and the transition from static to dynamic comparative advantage.
What is the central research question?
The central question concerns the impact of trade on economic performance and under which conditions trade liberalisation or protectionist policies are most beneficial for welfare.
Which scientific methods are employed?
The research relies on literature review, empirical evidence analysis, and formal mathematical modelling based on economic growth models like Solow, Ricardian, and Krugman/Redding frameworks.
What does the main part of the thesis encompass?
The main body breaks down the theory of economic growth, analyzes how trade influences these growth factors, and builds models for both static and dynamic comparative advantage to evaluate welfare.
What are the characterizing keywords of the work?
The core concepts are Economic Growth, International Trade, Comparative Advantage, Endogenous Growth, and Welfare Analysis.
How does the author explain the 'Infant Industry Argument'?
The author describes it as a policy justification for protecting emerging sectors from foreign competition until they achieve sufficient productivity to be competitive on the global market.
What role does 'Learning by Doing' play in the analysis?
'Learning by Doing' is used as a mechanism for endogenous productivity growth, where cumulative experience in production leads to increased efficiency over time.
Why is the static Ricardian model expanded in the paper?
The static model is extended to provide a foundation for dynamic analysis, allowing the author to study how trade patterns lock in and evolve due to changes in relative productivity.
- Arbeit zitieren
- Julia Martins (Autor:in), 2010, Trade and Economic Growth, München, GRIN Verlag, https://www.hausarbeiten.de/document/174154
