Chapter 12

INTERNATIONAL TRADE THEORYAND

DEVELOPMENT STRATEGY
Trade and Development Economics
 Introduction: International Trade
Theory and Development Strategy
 Scope of the Topic

Economic Globalization International Trade Traditional Theory of

International Trade
International Trade and
some key issues This theory explains
Economies over the
regarding Trade and why countries trade with
past several decades.
development, demand each other.
and exports and
Prebisch-singer
hypothesis
 Globalization

Is a process of interaction and integration among

the people, companies and government of different
nations . A process driven by international trade and
investment aided by information technology
Also refers to emerging "global culture"
Globalization Globalization
Downsides
Oportunities
• Growth of Knowledge • Climate Change

• More Innovations • Environmental Depredation

• Faster Development • Corruption

• More Business Opportunities • Inequalities

• Prosper Unity
International
Trade Theory
 What is International
Trade ?
Definition Advantages
Is an exchange involving
a goods or sevice - allows a country to Expands Markets and
conducted between at specialize in access to wider and
least two different manufacturing a certain variety of goods and
countries product and produce services.
- played a central role in efficiently.
the developing world.
 Key Issues in
International Trade
PRIMARY PRODUCTS Export Dependence
• Derived from all A country reliance on
extractive farming, exports as the prior
lumbering, fishing, source of financing for
mining and other raw development activities.
materials.
SECONDARY
PRODUCTS
• The result of further
processing of the
primary product
 What is International
Trade theory ?
Concept
Traditional Theory of
The pattern of International Trade and International Trade
International Trade and some key issues
the Distribution of the regarding Trade and This theory explains
gains from trade development, demand why countries trade with
and exports and each other.
Prebisch-singer
hypothesis
5 Basic Questions about trade
and Development
1. How does International Trade affect the rate, structure and character of
economic growth?

2. How does trade alter the distribution of income and wealth within a
country and among different countries?

3. Under what conditions can trade help a nation to achieve its development
objectives.

4. Can a developing country by its own actions determine how much it

trades or which products and services it sells?

5. In the light of past experience and prospective judgment should a

developing country adopt an outward looking policy or an inward looking
one or some combination of both?
 IMPORTANCE OF EXPORTS TO DIFFERENT DEVELOPING
NATIONS

Developing countries - heavily dependent on trade international economic relations

because most trade is in merchandise for which price disparities are smaller across
countries.

Developed Countries - they have higher variety of merchandise exports than

developing country average.
 Demand Elasticities and Export Earnings Instability

Income Elasticity of Demand - Income elasticity of demand (IED) is a measure

that shows how much the quantity demanded of a good changes in response to a
change in consumers' income levels.

Export Earnings Instability - fluctuations in revenue earned by a country from it's

export over time.
 Prebisch Singer Hypothesis

The Prebisch-Singer hypothesis, proposed by economists Raúl Prebisch and Hans Singer,
suggests that over the long term, the prices of primary commodities (such as agricultural
goods and raw materials) tend to decline relative to the prices of manufactured goods. This
hypothesis implies that countries relying on the export of primary commodities will face
declining terms of trade, meaning they will receive less in exchange for their exports
compared to what they have to pay for imports, leading to economic challenges. The
hypothesis has been debated and studied extensively, influencing discussions on
international trade and development policies.
 Traditional Theory of InternationalTrde

The traditional theory of international trade, often associated with economists like David
Ricardo and Adam Smith-

is based on the principle of comparative advantage. According to this theory, countries

specialize in producing goods and services in which they have a comparative advantage,
meaning they can produce more efficiently or at a lower opportunity cost compared to other
countries. Through trade, countries can exchange these goods and services, leading to
mutual benefit and increased overall efficiency. The traditional theory highlights the
importance of free trade, specialization, and the division of labor in promoting economic
growth and prosperity on a global scale.
 Terms Related to the
Theory
Comparative Advantage - a country should specialize in producing the
goods or services it can produce most efficiently.
Specialization - Concentration of resources in the production of relativity few
commodities

Absolute Advantage - Production of a commodity with the same amount of

real resources as another producer but at a lower absolute unit cost.
Factor Endowment Trade
theory

Neoclassical model of trade ñ theory suggesting that countries

specialize in producing and exporting goods that utilize their
abundant factors of production, while importing goods that
require factors of production in which they are relatively scarce.
 12.4
Free Traditional
Trade Free-Trade
The Critique of Theory
Traditional Free-
Trade Theory
The Key
Critique Differences
 Refers to unrestricted trade
Free Trade between nations

Minimal government A policy or practice

intervention

Eliminates barriers to Promotes global

international trade exchange
 Traditional Free Trade Theory

Aset of economic
principles

Comparative Advantage

Specialization fuels prosperity

 key differences

• policy or practice
Free Trade • the action
• real-world practice with its
complexities

• set of economic principles

• explains why the action might be
a good idea.
Traditional Free-Trade
• relies on simplifying assumptions Theory
 Fixed Resources, Full Employment, and the International

Critique Immobility of Capital and Skilled Labor

Points: Unemployment, Resource Underutilization, and the Vent-

for-Surplus Theory of International Trade

Trade Gains Accruing to Nationals

The Absence of National Governments in Trading
Relations
Fixed, Freely Available Technology and
Consumer Sovereignty Internal Factor Mobility, Perfect Competition, and
Uncertainty: Increasing Returns, Imperfect Competition
Balanced Trade and International Price and Issues in Specialization
Adjustments
 12.5

Traditional Trade Strategies and Policy

Mechanisms for Development

Trade Policy Development Approaches to

Options Strategies Trade International
trade
 Export Promotion vs. Import Substitution
• Increase sales of domestic products • Reduce the cost of goods and services
in foreign markets • Increase the variety of goods and
• Create jobs in export-oriented services available to domestic
industries consumers
• Boost economic growth • Promote competition in domestic
• Improve the balance of trade markets
• Increase foreign exchange earnings • Stimulate Innovation in domestic
• Enhance national competitiveness industries
• Attract foreign investment • Improve the quality of domestic
• Develop new markets for domestic products and services
products • Reduce dependence on foreign
• Reduce reliance on domestic markets suppliers
• Ensure access to essential goods and
services
 Exporting Expanding Import Tariffs, Infant
Promotion: Exports of Substitution: Industries, and they
Looking Outward Manufactured Looking Inward Theory of
and Seeing Trade Goods but Still Paying Protection
Barriers Outward

The IS Foreign-Exchange Trade Optimists

Industrialization Rates, Exchange and Trade
Strategy and Controls, and the Pessimists:
Results Devaluation Summarizing the
Decision Traditional Debate
12. 6: The Industrialization Strategy Approach to Export Policy
• Industrialization Strategy Approach is a school of thought in trade and development that emphasizes the
importance of overcoming market failures through government policy to encourage technology transfer and
exports of progressively more advance products.

• Focus on government interventions to encourage exports (industrial policy)

• Without proper attention to incentives, industrial policies may be counterproductive too

12.7: South and South Trade and Economic Integration

Economic Integration: Theory and Practice

• The growth of trade among developing countries.

• Integration encourages rational division of labor among a group of countries and

increases market size.

• Provides opportunities for a coordinated industrial strategy to exploit economies of

scale.

• Two long-term dynamic arguments for integration, there are also the standard static
evaluative criteria known as trade creation and trade diversion.
 12.7: South and South Trade and Economic Integration

Regional trading blocs and the globalization of trade

• The North American Free Trade

• The Southern Common Market • South African Development
Agreement (NAFTA)
(MERCOSUR) Community (SADC)

• Regional trading blocs have emerged in Europe, North America,

Latin America, Africa, and Asia.
12.8: Trade Policies of Development Countries : The Need for Reform
and Resistance to New Protection ist Pressure

• 1995 Uruguay Round

• Despite 8 liberalization rounds over 50 years trade

barriers remain in place in agriculture and textiles

• Doha Development Round 2001

Thank you very
much!
References
WTO | Understanding the WTO - the Uruguay Round. (n.d.).

https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact5_e.htm

Team, C. (2023, November 22). Four Asian tigers. Corporate Finance Institute.
https://corporatefinanceinstitute.com/resources/economics/four-asian-tigers/

Investopedia.com. (n.d.). Free Trade.

Investopedia.com. (n.d.). Free Trade Retrieved March 19, 2024.

Economic Development 12th by Michael P. Todaro, Stephen C. Smith