Chapter 1212.1 Economic Globalization: An Introduction12.2 International Trade: Some Key IssuesSlide 4Slide 5Table 12.1 Merchandise Exports in Perspective: Selected Countries, 2008Demand Elasticities and Export Earning InstabilityThe Terms of Trade and the Prebisch-Singer Hypothesis12.3 The Traditional Theory of International TradeFigure 12.1 Trade with Variable Factor Proportions and Different Factor EndowmentsFigure 12.1 Trade with Variable Factor Proportions and Different Factor Endowments (continued)12.3 The Traditional Theory of International Trade (cont’d)Slide 1312.4 Critique of Traditional Free-Trade Theory, in the Context of Developing-Country Experience12.4 The Critique of Traditional Free-Trade Theory in the Context of Developing-Country ExperienceSlide 16Figure 12.2 The Vent-for-Surplus Theory of Trade12.4 The Critique of Traditional Free-Trade Theory in the Context of Developing-Country Experience (cont’d)Slide 19Slide 20Slide 21Slide 22Slide 2312.5 Traditional Trade Strategies for Development: Export Promotion versus Import SubstitutionSlide 25Figure 12.3 Import Substitution and the Theory of Protection12.5 Traditional Trade Strategies for Development: Export Promotion versus Import Substitution (cont’d)Slide 28Slide 29Slide 30Slide 31Slide 32Figure 12.4 Free-Market and Controlled Rates of Foreign ExchangeSlide 34Slide 35Slide 36Export-Oriented Industrialization Strategy: Some arguments in the literature on why, in principle, it could be effective:12.6 The Industrialization Strategy Approach to Export Policy12.7 South-South Trade and Economic IntegrationSlide 4012.8 Trade Policies of Developed Countries: The Need for Reform and Resistance to New Protectionist PressuresFigure 12.5 Effective Tariff Faced by Income Groups, 1997-1998Concepts for ReviewConcepts for Review (cont’d)Slide 45Slide 46Slide 47Slide 48Copyright © 2012 Pearson Addison-Wesley. All rights reserved.Chapter 12International Trade Theory and Development StrategyCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 12-212.1 Economic Globalization: An Introduction•Globalization- many interpretations•Core economic meaning- the increased openness of economies to international trade, financial flows, and foreign direct investment•Concerns with globalization center around the unevenness of the process, and risksCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 12-312.2 International Trade: Some Key Issues•Many developing countries rely heavily on exports of primary products with attendant risks and uncertainty•Many developing countries also rely heavily on imports (typically of machinery, capital goods, intermediate producer goods, and consumer products)•Many developing countries have chronic deficits on current and capital accounts which depletes their reserves, causes currency instability, and may slow economic growth•Recently many developing countries sought to promote exports and accumulate large foreign exchange reserves to cushion against crises - spurring new policy debatesCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 12-412.2 International Trade: Some Key Issues•Five Basic Questions about Trade and Development–How does international trade affect economic growth?–How does trade alter the distribution of income?–How can trade promote development?–Can developing countries determine how much they trade?–Is an outward-looking or an inward-looking trade policy best?Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 12-512.2 International Trade: Some Key Issues•The Importance of Exports to Different Developing Nations•Importance of exports to developing nations•Exports of developing countries are generally less diversified than those of developed countries•Merchandise exports as a share of GDP are often higher for developing countriesCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 12-6Table 12.1 Merchandise Exports in Perspective: Selected Countries, 2008Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 12-7Demand Elasticities and Export Earning Instability•Often low price elasticity of demand for agricultural commodities but supply shocks•Often low price elasticity of supply for basic commodities but demand shocks•Result can be export earnings instability; risks to income•Also, low income elasticity of demand for primary products:Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 12-8The Terms of Trade and the Prebisch-Singer Hypothesis•Total export earnings depend upon:–Total volume of exports sold; and,–Price paid for exports•Prebisch and Singer argued commodity export prices fall over time, so developing countries lose revenue unless they can continually increase export volumes •They concluded that developing countries need to avoid dependence on primary exports•Some evidence relative prices within manufactures are also diverging with falling prices for low-skill productsCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 12-912.3 The Traditional Theory of International Trade•Comparative advantage–specialization•Relative factor endowments and international specialization: the Neoclassical model–Ricardo and Mill (static model)–Heckscher and Ohlin (factor endowment theory)•Different products require productive factors in different ratios•Countries have different endowments of factors of productionCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 12-10Figure 12.1 Trade with Variable Factor Proportions and Different Factor EndowmentsCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 12-11Figure 12.1 Trade with Variable Factor Proportions and Different Factor Endowments (continued)Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 12-1212.3 The Traditional Theory of International Trade (cont’d)•Main conclusion of the neoclassical model is that all countries gain from trade•World output increases with trade•Countries will tend to specialize in products that use their abundant resources intensively•International wage rates and capital costs will gradually tend toward equalization•Returns to owners of abundant resources will rise relatively•Trade will stimulate economic growthCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 12-1312.3 The Traditional Theory of International Trade (cont’d)•Trade theory and