Chapter 10
International Trade and
Economic Growth
This chapter concludes our treatment of the pure theory of international trade by considering the
interactions between international trade and economic growth. The first part of the chapter discusses
economic development and, in particular, various trade policy strategies pursued by developing countries.
The discussion then turns to an analysis of models involving growth of factors of production under
assumptions of full employment. This material is probably the most analytically difficult material in the
first part of the text. It can easily be omitted from the course without loss of continuity. On the other hand,
it can be taught without the use of mathematics. Moreover, it provides a convenient mechanism to explain
the recent emergence of certain countries such as Japan and the NICs (e.g., Korea, Brazil, Singapore, etc.)
as major competitors to the United States in world export markets for manufactured goods. The chapter
closes with a discussion and analysis of international flows of factors of production.
◼ Chapter Outline
Introduction
Trade and Development
Chapter 10 International Trade and Economic Growth 45
1. Compare and contrast the types of trade policy actions taken by governments that pursue import-
substitution substitution policies versus those that pursue outward-looking strategies.
2. Many Latin American countries have followed import-substitution policies. Many of these same
countries have also experienced long periods of high inflation. Explain some of the possible linkages
between import-substitution policies and high inflation.
3. According to Table 10.1, many developing countries have begun to replace quotas with tariffs as they
adopt more outward-looking strategies. Discuss some possible motives for these changes.
5. Explain carefully how international trade can affect the rate of growth of an economy.
In an economy with unemployed factors, increased trade (via export sales) can bring about an overall
expansion in production and an accompanying fall in the unemployment rate. The magnitude of the
46 Husted/Melvin • International Economics, Ninth Edition
6. Suppose that in country A the income elasticity of demand for good S is less than 1 and the income
elasticity of demand for T is greater than 1. Suppose also that A exports good S and imports good T,
and the S is relatively capital intensive in its production and that A is relatively capital abundant.
What would happen to A’s trade pattern if alternatively,
10.6, won’t be a straight line but rather will curve towards the T axis. It also means that any increase
in income will be pro-trade biased.
a. Equiproportionate growth will result in increased production in the same proportions, but
consumption of S (the import) will grow more than consumption of T (the export). This is pro-
trade biased growth.
b. When capital increases relatively more than labor, then production of the exportable will increase
7. Compare the costs of a MNC operating in a foreign country with the cost of domestic firms operating
in that country. Explain how a MNC can compete under these circumstances.
An MNC faces an enormous number of additional costs that domestic firms do not. Foreign firms
often must receive permission from numerous government agencies before they are even allowed to
begin business activities. Then they must negotiate the costly international transfer of financial or
physical capital. They also must learn what constitutes common business practices in this new
environment, including how to deal with customs procedures, government regulators, etc. There are
Chapter 10 International Trade and Economic Growth 47
8. Suppose that A is a small open economy that takes world prices as given. What would be the effect on
wages and rents in A if it were to experience an inflow of foreign capital. Use a diagram to explain
your answer. Which groups would favor this capital inflow? Which would oppose it? Explain.
9. What is immizerizing growth? Do you think it is likely to occur in the real world? Explain.