Economic Growth in a More Integrated World What is economic growth? Sources of economic growth Factor movement Labor Movements Capital Movements Multinational Corporations

Economic Growth Economic growth refers to an increase in the real output of the economy: An outward shift of the production possibilities frontier Sources of economic growth: »Increases in the quantities of resources »Technological progress Exogenous and endogenous sources of growth The income effect of economic growth

Trade and Economic Growth Does (international) trade contribute to economic growth? Economic growth and terms of trade The challenges developing countries face in increasingly globalized economy –Inadequate savings/investments –Rapid population growth and relatively small labor force –Deteriorating terms of trade –Weak “institutions” (economic, political, social) –And AIDS

The World Bank’s Classification of the Nation States $GDP PER CAPITA BY COUNTRY GROUP 2000 Low Income 426 Lower Middle 1,146 Upper Middle 4,900 High Income 27,609 Middle East and N.Afc 2,235

Source: The World Bank

Source: World Bank

The structural differences: Labor: Labor force participation Female labor force participation Skilled and semiskilled labor Capital: Physical capital Human capital Infrastructure Physical infrastructure Institutional infrastructure Social/Cultural infrastructure Capital Stock and Labor Productivity

Balanced Growth: More Inputs Balanced growth: Proportional increases in labor and capital Cloth Food o Po Co P1 C1 Uo U1

Will balanced growth necessarily increase welfare? Population increase vs. labor force increase The effect of growth on terms of trade –The small country case –The large country case –When a number of small countries exporting the same product grow simultaneously

Growth Effects Income Effect Price or Terms-of-trade effect Effects on trading partner Trade effect Production effects In the case resource growth In the case technological progress

Growth and Terms of Trade U2 Uo U1 o C F TT TT’ Po P1 P2 TT: (Pc/Pf) TT’: (Pc/Pf)’ (Pc/Pf) > (Pc/Pf)’ (Immiserizing Growth)

Growth and Terms of Trade U2 Uo U1 oC F Po P1 P2 TT: Pc/Pf TT’: (Pc/Pf)’ (Pc/Pf) > (Pc/Pf)’ TT TT’

Factor Mobility Recall factor price equalization theorem Labor mobility: migration/immigration Capital mobility: »Portfolio investments »Direct investments »Multinational corporations Horizontal MNEs Vertical MNEs Conglomerates

A Simple Model Total Labor Oa Ob S S’ D:VMPLb D:VMPLa wao wbo Wb1 WaWb D’: Tax VMPLa(1-t)

A Simple Model Total Capital Oa Ob S S’ D:VMPKb D:VMPKa ra rb rbo rao ra1 rb1

Multinational Enterprises An MNE is a firm that owns, controls and manages production or service facilities in two or more countries »Horizontally integrated MNEs »Vertically integrated MNEs »Conglomerates Capital arbitrage The location theory Bypassing trade barriers: R&Ds and FDIs »Are MNEs substitutes or complements to trade? »Do MNEs facilitate transfer of technology? »Do MNEs exploit and abuse their host countries? MNEs and Economic Development Saving, investment and economic growth