Pos M. Hutabarat, PhD INTERNATIONAL TRADE Trade and Economic Growth (course #10) Pos M. Hutabarat, PhD FE, University of Indonesia Jakarta, 6 April 2010

Pos M. Hutabarat, PhD International Trade vs. Economic Growth There are causality relations between international trade and economic growth. 1.International Trade push Economic Growth 2.Economic Growth push International Trade

Pos M. Hutabarat, PhD International Trade push Economic Growth International Trade push economic Growth through : 1.Increasing Production (shifting Production Possibility Frontier) 2.Increasing Consumption (shifting Indifference Curve)

Pos M. Hutabarat, PhD The effects of Production 1.Both products expand in at the same proportion (neutral production effects) 2.Both products expand but one grow relatively faster than the other (pro-trade or anti-trade production effect) 3.One products expand absolutely but the other decline (ultra pro-trade or ultra anti-trade production)

Pos M. Hutabarat, PhD Production effects Y X

Pos M. Hutabarat, PhD The Effects of Consumption 1.Consumption of both products grow by the same proportion (neutral consumption effects) 2.Consumption of both products grow, but one product grow relatively faster than the other one (pro-trade or anti-trade consumption effect) 3. Consumption of one product grow absolutely but the other one decline (ultra pro-trade or ultra anti-trade consumption effect)

Pos M. Hutabarat, PhD Consumption effects Y X

Pos M. Hutabarat, PhD Economic Growth push International Trade Economic Growth could expand international trade, since economic growth could be seen from expansion of production, and excess of production over consumption could be exported. Economic Growth needs import of capital goods and raw materials.

Pos M. Hutabarat, PhD Effect of Growth (on the size of Trade) 1.Volume of Trade decline (the size of trade triangle smaller) 2.Volume of Trade increase (the size of trade triangle larger) 3.Volume of Trade un-change (the size of trade triangle equal)

Pos M. Hutabarat, PhD Production effects Y X

Pos M. Hutabarat, PhD Income Elasticity of Import Income elasticity of import (E YM ) defined as the percentage change of import by one percent change on income. E YM = 1Trade is growing at the same rate as national income E YM > 1Trade is growing more rapidly than income E YM < 1Trade is growing absolutely but at a slower rate than income

Pos M. Hutabarat, PhD Factors supporting Economic Growth 1.Increasing technology 2.Accumulation of factors of production (capital and labor) Economic Growth can result from changes in:

Pos M. Hutabarat, PhD Effects of Technological Change The effects of technological change can be seen from changing in input utilization: Factor neutral (Ratio K/L constant) Labor saving (Ratio K/L increase) Capital saving (Ratio K/L decrease)

Pos M. Hutabarat, PhD Technological change X Y Commodity specific technology change Commodity neutral technology change X y

Pos M. Hutabarat, PhD Effects of Increasing factors of production Effects of increasing factor of productions can be: 1.Increasing capital and labor by the same proportion 2.Capital increasing by larger proportion than labor 3.Capital increasing by smaller proportion than labor

Pos M. Hutabarat, PhD The effects of factor growth XXX Y Y YFactor neutral growth Growth in capital only Y is capital intensive X is labor intensive Growth in labor only

Welfare Effects (factor growth)  Small Country (do not significantly affect supply to international market, international price not change)  Large Country (usually significantly affect supply to international market, price change) - possibility of immemerizing growth (when wellfare decline after grwoth) Pos M. Hutabarat, PhD

General Eqquilibrium Pos M. Hutabarat, PhD