(IBAT 1) Theories of trade and economic development

Mercantilism

Aims to support exports and limiting imports

Three falacies of Mercantilism

1. Golds and metals has intrinsic value

2. Ignores production efficiency through specialization

3. Concern in overall goal of system

Classical Theory

• Superseded 1st theory at the beginning of 19th century

• based on economic theory of free trade

• in 1977 “The wealth of nations” by Adam Smith

Comparative Advantage

• David Ricardo developed its important concept

• John Stuart Mill developed the concept of "Terms of Trade

Weaknesses ofEarly Theories

• Traditional employment

• disregarding dynamic process

• not considering the full range costs

Factor Endowment Theory

• Eli Heckscher and Bertil Ohlin Theory

• Resulted to availability and low costs

The Leontief Paradox

• W.W. Leontief in 1950s

• US exports were less capital intensive that imports

Criticisms

• it is nation trade

• traditional theories assumes perfect competition

• does not comprehend in the dynamic flow

• does not recognize importance of technology

Michael Porter

• Authored the “National competitive advantage theory”

National competitive advantage theory

• It discusses many of the elemen

• believes that successful international trade from from the interaction of four country

FACTOR CONDITION:

• Includes land, labor and capital

• includes education of the workforce and the quality of a country’s infrastructure as important factor condition

DEMAN CONDITION

• Relate to the need for strong domestic consumption to spur the innovation of products and services

RELATED AND SUPPORTING INDUSTRIES

• successful international expansion requires having a successful product in the domestic market

• a successful industry stimulate local supplier activity

FIRM STRATEGY, STRUCTURE, AND RIVALRY

• Porter’s last dimension is company strategy

Rostow's Stages ofEconomic Growth

1. Stage 1: Traditional Society

2. Stage 2: Preconditions for Takeoff

3. Stage 3: Takeoff

4. Stage 4: The Drive to Maturity

5. Stage 5: The Age of Mass Consumption

Stage 1: Traditional Society

Rostow saw traditional society as a static economy, which he likened to the pre-1700s attitudes toward change and technology experienced by the world’s current economically developed countries. He believed that the turning point for these countries came with the work of Sir Isaac Newton, when people began to believe that the world was subject to a set of physical laws but was malleable within these laws. In other words, people could effect change within the system of descriptive laws as developed by Newton.

Stage 2: Preconditions for Takeoff

Rostow identified the preconditions for economic takeoff as growth or radical changes in three specific, nonindustrial sectors that provided the basis for economic development:

Increased investment in transportat ion,

which enlarged prospective markets and increased product specialization capacity

Agricultural developments,

which provided for the feeding and nourishing of larger, primarily urban, populations

expansion of imports

into the country

Stage 3: Takeoff

The takeoff stage of growth occurs, according to Rostow, over a period of 20 to 30 years and is marked by major transformations that stimulate the economy. These transformations could include widespread technological developments, the effective functioning of an efficient distribution system, and even political revolutions. During this period, barriers to growth are eliminated within the country and, indeed, the concept of economic growth as a national objective becomes the norm. To achieve the takeoff, however, Rostow believes that three conditions must be met:

Stage 4: The Drive to Maturity

Within Rostow’s scheme, the drive to maturity is the stage during which growth becomes self-sustaining and widely expected within the country. During this period, Rostow believes that the labor pool becomes more skilled and more urban and that technology reaches heights of advancement

Stage 5: The age of Mass Consumption

The last stage of development, as Rostow sees it, is an age of mass consumption, when there is a shift to consumer durables in all sectors and when the populace achieves a high standard of living, as evidenced through the ownership of such sophisticated goods as automobiles, televisions, and appliances.

The Big Push: Balanced Vs Unbalanced Growth

Economist Ragnar Nurske advocated that development efforts should consist of a synchronized use of capital to develop wide ranges of industries in nations. He believed that only a concerted overall effort would propel developing nations beyond the vicious circle of poverty, in which the limited supply of capital is caused by low savings rates.

Hirchman 's Strategy of Unbalance

Albert O. Hirschman promulgated the idea of making unbalanced investments in economic sectors to complement the imbalances that already exist within the economy of a nation. Hirschman argued that the LDCs do not have access to adequate resources to mount a balanced, big-push investment strategy. Investments should be made instead in strategically selected economic areas, in order to provide growth in other sectors though backward and forward linkages

Backward Linkages

Spur new investment in input industries

Forward linkages

Those sector that buy the output of the selected industry

Galbraith'sEquilibrium of Poverty

John Kenneth Galbraith was one of the first economists to discuss the mind-set of individuals in developing countries, in a term he coined as the “equilibrium of poverty. Galbraith stated that to break the contentment there needed to be education as well as traumas (famines, droughts, etc.) that caused the desire for change. Globalization itself often contributes to showing people in developing countries a better way of life (via radio and television ads).

Adequate security

against expropriation of property, physical threats, or very high taxation.

Reliable infrastructure system

of roads, ports, electrical power supplies, and communications

Adequate supply of capital

from private investment and public borrowers and an intelligent system for passing on loans.

State-supported industries

initially, as they have more means in developing countries than do individual firms

Trraining and specialized education

in order to obtain a workforce capable of doing the required tasks of employment.

Amartya Sen 's DevelopmentasFreedom

Amartya Sen, recipient of the 1998 Nobel Prize in Economics, further improved the framework for development that Galbraith and others had started. Amartya Sen asked the question, Is the measure of GDP growth the best way to compare the living standards of the world’s people? Sen considers the measurement of GDP to be an aggregate measure of the wealth produced within a country, but it does not necessarily account for quality-of-life issues. He has also questioned the viability of the concept of the “poverty line” and has offered a similar line of reasoning for why this measure, as well as GDP, is unsuitable for developing countries.

Sen has offered a framework for development as follows:

• Political freedoms

• Economic facilities

• Social opportunities

• Transparency guarantees

• Protective security

The Political Continuum

Political system constitute the methods in which societies organize in order to function smoothly, and such orientation provides one such classification continuum

Two extremes of political organization in the global political arena of the 2000s

1. Pluralistic:

2. Political Spectrum:

Pluralistic:

societies in which all members have significant power in the decision?making process surrounding the activities, policies, and objectives of their government. These systems are often pluralistic (incorporating a number of different views), use the concept of majority rule in deciding major issues, and often employ a system of representative democracy, where officials are elected to represent their regional constituencies. These nations generally afford all of their citizens some degree of liberty and equality.

Political Spectrum:

Is the totalitarian state, which is identified by a singular lack of decision-making power among the country’s individual citizens. In such a political system, decisions regarding policies, objectives, and the direction of the nation are controlled by a select few individuals who generally operate under the auspices of the government. In these states, the activities and liberties of citizens are often restricted.

Free-enterprise system

the market, defines the relationships among prices for goods and services, quantities produce domestically, and overall supply and demand.

Free-market economics

The creation of profit is generally considered to be the operational motive of business, and profitability tends to be the test of success

Capitalist economies

also promote the ownership of private property by individuals and theoretically attempt to limit public (state) owner ship of property.

Centrally planned or nonmarket

the government decides what is to be produced, when and were it will be made, and to whom it will be sold

THis centrally planned type of economic structure

based on the belief that a single central agency can coordinate economic activity to provide harmony in the interrelationship of all sector of the economy

Basic features of mixed economies

the welfare state and heavy involvement of the government in the economic planning of the nation

Supply and demand in production are determined to a degree

by consumers in marketplace, source of supply and means of production are owned by private interest or individuals

totalitarian societies

are characterized by government allocation of resource and state ownership of the means of production

GROSS NATIONAL INCOME per Capita

a benchmark used in determining level of development because it represent a measure of production to relative population that can be compared across nation

First world

the industrialized, developed, countries are commonly referred o as the first world (High income countries)

Second World

• There is a wide variety of cultural and economic factors at play within this segment

• emerging economics consist of countries such as China, turkey

Third World

considered to include developing, less developed, and underdeveloped countries

The Subterranean Economies

Goods can be traded in barter systems, in which no money changes hands but the economic exchange has been made. These systems also lead to a distortion of aggregate economic data and tax evasion by the participants.

Dead Capital

refers to the lack of a legal system of private land ownership in much of thirdworld