Quality of Imports Relative to Exports,and the Transmission of Sustained Growth through the Terms of Trade

Abstract

This paper shows that an economy can import sustained growth, in spite of not possessing mechanisms to absorb foreign knowledge. To do that, it develops a two-country model of exogenous growth with investment-specific technological change. In autarky, one country sustainably grows while the other economy remains stagnant. In the trade situation, the quality-adjusted terms of trade become increasingly favourable to the second economy, which results in the transmission of growth. The continuous improvement in the quality of imported capital goods relative to exported consumption goods is the reason why this occurs. Moreover, this mechanism leads to convergence in per capita income if trade involves incomplete specialisation.     

Growth, Trade, and Government Policies of a Small Open Economy

Utilizing a linear endogenous growth model, the paper provides an economic rationale for two empirical findings: the positive correlation between export growth and income growth, and the association of rapid structural changes with fast income growth. In the benchmark case, the small open economy converges eventually to a balanced growth path along which exports and total output grow at the same constant rate as consumption. Government policies affect the pattern of specialization and trade since they change the autarky or foreign relative price. Only taxation on the capital goods sector can affect asymptotic growth rates.     

Productive Capacity, Product Varieties, and the Elasticities Approach to the Trade Balance

Most macroeconomic models imply that faster income growth tends either to lower a country’s trade balance by raising its imports with little change to its exports or to reduce its terms of trade in order to maintain balanced trade. Krugman (1989 ) proposed a model in which countries grow by producing new varieties of goods. In his model, faster‐growing countries are able to export these new goods and maintain balanced trade without suffering any deterioration in their terms of trade. This paper analyzes the growth of US imports from different source countries and finds strong support for Krugman’s model.     

Vertical specialization in North–South trade: Industrial relocation,wage and welfare

This paper presents a North–South trade model with vertically linked industries and examines how declining costs of trade across stages of production encourage vertical specialization and affect wages and welfare. As trade costs fall below a threshold, the production of all final goods relocates to the South and vertical specialization emerges. In some industries, production of intermediate goods also relocates against comparative costs because of benefits of co‐location, and further declines in trade costs lead to reshoring. A country may temporarily lose from falling trade costs, but both countries can be better off after trade costs fall sufficiently.     

Growing Trade in Intermediate Goods: Outsourcing,Global Sourcing,or Increasing Importance of MNE Networks?

Growth in trade is often seen to have played a dominant role in integrating national economies. Analyses of this role have, however, almost exclusively been based on trade in final goods. This paper attempts to address this problem by analyzing recent growth in intermediate goods. Three possible causes are posited for this growth: outsourcing, global sourcing, and the increasing importance of MNE networks. These are examined in two analytical frameworks: one using OECD input–output table data and one using German time‐series data. Results from both frameworks give strong support to the hypothesis that international production plays a great role in explaining the strong increase in intermediate inputs imports of developed countries. The evidence for the hypothesis that the increasing importance of the MNE network causes the growing trade in intermediate goods is especially strong. The outsourcing hypothesis receives also some support.     

Growing through trade in intermediate goods: the role of foreign growth and domestic tariffs

We show that pure Ricardian trade can account for the empirical evidence that domestic growth is more affected by foreign growth than by trade openness. To do this, we develop a two‐country model involving a backward economy that exchanges intermediate goods with a faster growing country. We obtain three main results regarding growth and welfare of the backward economy: (i) the growth‐enhancing comparative advantage is facilitated by faster foreign growth; (ii) the growth rate may be negatively affected or unaffected by a domestic tariff, while it is always positively impacted by foreign growth; and (iii) a domestic tariff could be welfare‐improving.     

Distance to Frontier and New Import Growth

In a panel‐data study involving product‐level import data for 48 developing countries that underwent substantial trade liberalization between 1989 and 2001, this study finds that the growth of trade in new goods imported following major trade liberalization is related to the state of technology that existed just before liberalization. The study develops two new measures of the extensive margin. Findings indicate that greater is the distance of a country from the world technology frontier, the faster is its growth of new goods imports. This indicates a higher cost of trade protection for countries further away from the world technology frontier.     

R&D Spillovers and Growth: Specialization Matters

We explore the relationship between openness and growth by taking a closer look at trade‐related knowledge spillovers at the industry level. First, we estimate the relation between sectoral R&D expenditures, trade‐related spillovers, and growth. Next, we incorporate these R&D linkages in a computable general‐equilibrium model for the world economy. We simulate trade liberalization in the model with R&D spillovers and compare the effects on GDP in different regions with a non‐R&D‐based model simulation. We find that the GDP effects of trade liberalization are magnified considerably by R&D spillovers for some regions—notably Japan and Southeast Asia. In other regions, such as China, the additional GDP effects are modest. These findings can be traced back to changing specialization and import patterns.     

Structural Change and Growth in a NEG Model

This paper presents a New Economic Geography model of structural change, agglomeration and growth. Assuming a non‐homothetic preference structure, our results show that a progressive reduction of trade costs allows the economy to pass from a pre‐industrialized to an industrialized stage and then, within the latter, from a dispersed to an urbanized regime. However, the introduction of capital accumulation and the dynamic setting of our model opens the door to a richer set of implications. First, an additional stage is introduced as, for some intermediate values of trade costs, a multiple equilibria regime emerges with simultaneously stable symmetric and core‐periphery equilibria. Second, the introduction of non‐homotheticity introduces a new channel through which growth is affected by trade costs and agglomeration. In particular, integration is always growth‐enhancing while agglomeration is growth‐detrimental.     

Imperfect Competition and Growth with Entrepreneurial Risk

Abstract. This paper analyzes an overlapping generations endogenous growth model of occupational choice under risk in a two-sector economy with intermediate and final goods. Agents choose between business ownership in the monopolistically competitive intermediate goods industry or employment as a worker in this sector. Firm-specific profits are stochastic. Occupational choice under risk endogenizes the number of firms and products in the intermediate goods industry. The analysis shows that economic performance and growth both depend on the entrepreneurship rate and are inefficiently low compared with an economy with perfect markets for pooling risks. Monopolistic competition partly offsets the negative income effects from a too low level of entrepreneurial risk-taking.     

Unequal factor prices and incomplete specialization in a Heckscher-Ohlin model of endogenous growth

Two-factors, two-goods Heckscher-Ohlin trade theory predicts that under certain circumstances factor prices equalize if countries are incompletely specialized. If at least one country is completely specialized no factor-price equalization obtains. Different factor rewards and free trade, however, are not automatically linked to complete specialization: in a Heckscher-Ohlin model of endogenous growth where the countries differ in their individual discount rates, a situation of incomplete specialization and different factor rewards will result.     

Similarity in trade structures,integration and catching‐up1

In this paper, we look at the role of export composition in the growth process, considering how increased similarity in trade structure among countries can induce catching‐up in income levels in a group of countries in transition. We analyze the sectoral export patterns of the Central and Eastern European countries (CEECs) by comparing them to those of the current members of the European Union (EU), focusing on countries’ specialization as suppliers for the EU market, and we assess whether similar export patterns foster the catching‐up process of the CEECs. Our main result is that similarity in export composition has a positive, significant and non‐linear impact on catching‐up, and seems to be driven by the growth of the main export market and delocalization of production more than by other factors.     

Does Preferential Trade Benefit Poor Countries? A General Equilibrium Assessment with Nonhomothetic Preferences

We develop a Ricardian model of trade with nonhomothetic preferences to analyze preferential trade agreements (PTAs) among countries of different stages of economic development. The richer a country is, the more likely will PTAs improve its terms of trade, also when it is a non‐member. Rich non‐member countries are also less likely to incur welfare losses from PTAs. PTA membership only guarantees welfare gains for countries that are too poor to import the goods rich countries produce. For all other countries, the welfare effects of joining PTAs depend on the world income distribution and on the strength of comparative advantages.     

Skill Intensity in Foreign Trade and Economic Growth

This paper explores the link between trade structure, trade specialization and per capita income growth. It is argued that industrial upgrading in export specialization patterns has a positive long-run growth effect, while the effect of structural change in industrial import patterns is in principle ambiguous. A standard empirical growth model is augmented by various measures of structural change. The hypothesis that not trade per se matters, but that various types of trading activities impact differently on economic growth is tested on a sample of 45 countries (OECD members and selected Asian and Latin American countries) over the period 1981–1997. The data set comprises exports and imports for 35 manufacturing industries at the 3-digit level of the ISIC classification which are grouped according to skill intensity. The results of the dynamic panel estimation point towards a positive long-run growth effect arising from trade specialization in medium-high-skill-intensive industries. Further, important distinctions between the skill intensity of export and import patterns and their respective influence on economic development, as well as between the group of developing countries and OECD members are observed in this relationship.JEL classification: C23, F43, O19, O41, O57The author is grateful to Michael Landesmann and Robert Stehrer (wiiw), Neil Foster and Jesús Crespo Cuaresma (Department of Economics, University of Vienna), Michael Peneder (Austrian Institute of Economic Research) and two referees for valuable comments. This research is based on Jubiläumsfondsprojekt Nr. 8954, financial support by Oesterreichische Nationalbank is gratefully acknowledged.     

Climate and Scale in Economic Growth

This paper introduces new data on climatic conditions to empirical tests of growth theories. We find that, since 1960, temperate countries have converged towards high levels of income while tropical nations have converged towards various income levels associated with economic scale and the extent of the market. These results hold for a wide range of tests. A plausible explanation is that temperate regions' growth was assisted by their climate, perhaps historically for their transition out of agriculture into sectors whose productivity converges across countries, while tropical countries' growth is relatively more dependent on gains from specialization and trade.     

International Trade and Growth Miracles: the Implications of Nonhomothetic Preferences

If the rate of saving increases with income then a low per capita level of the capital stock may be self‐sustaining. In these circumstances international trade may allow an economy to quickly increase its per capita capital stock in a self‐reinforcing “growth miracle” process. A labor‐abundant economy trading with a capital‐abundant economy will see its wage rate rise relative to autarky. This rise in the wage rate also increases the savings rate and so raises the following period’s per capita capital stock. In this way a low‐income economy may exhibit large and permanent increases in its level of GDP per capita after opening its markets to international trade.     

International production fragmentation,trade in intermediate goods and environment

This paper examines the implications of growing international production fragmentation-induced trade in intermediate goods on environmental quality. Specifically, by making use of a general equilibrium framework, this paper explores the link between trade in intermediate goods and pollution in a setting of endogenous environmental policy. The paper shows that international trade in intermediate goods, through an increase in the number of components available to the international producers, affects the level of pollution and environmental quality. Specifically, developed countries may reduce pollution at the cost of more pollution in developing countries.     

Uncertainty,trade integration and the optimal level of protection in a Ricardian model with a continuum of goods

This paper analyzes the effects of increasing trade integration on individual utility when the international specialization pattern is stochastic, i.e. when the range of goods each country produces depends on the realization of a random variable. Using a Ricardian continuum of goods model it is shown that under uncertainty a trade-off emerges. As in the standard deterministic model, higher trade integration reduces prices and increases expected real income. However, higher trade integration, reducing the number of active sectors in the economy, also increases the displacement cost the worker suffers when the sector she is employed into has to close down because, ex-post, the foreign country's competing sector results to be more efficient. Two are the main results of the model. First, it is shown that, under uncertainty and job specificity, increasing trade integration is not always welfare enhancing. Second, there exists an optimal level of protection that is higher the smaller the price reduction induced by trade integration and the more technologically similar are countries.     

How Important Are Scale Effects for Growth When Knowledge Is a Public Good?

In this paper, by proposing an R&D accumulation law for an economy with an expanding number of firms, I seek to reconcile the following three facts: the positive relationship between the fraction of income allocated to R&D expenditure and growth; the positive relationship between the number of firms and total factor productivity growth; and knowledge as a non‐rival and non‐excludable good. There are scale effects because of the public nature of knowledge, but the economy also grows in the absence of population growth. I find that population growth explains one‐fifth of market income growth but only one‐sixteenth of efficient income growth.     

Economic Growth and International Trade: The Case of Hong Kong

This paper estimates the major factors of growth of Hong Kong using a fairly new approach, which allows the direct inclusion of the factors of growth in the growth equation to be estimated. The growth factors that are found to be important for Hong Kong are physical capital accumulation, (negative) growth of unskilled workers, education, technology spillover (from foreign countries) through retained import of capital goods and inward direct investment, and learning‐by‐doing through import and domestic manufacturing production. The results strongly suggest that other than primary factor accumulation, education, trade, and foreign direct investment have contributed a lot to the growth of the economy.