International Business Chapter 18 The Dynamic Effects Trade Are Related Such Phenomena Demonstration Effects Associated With

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CHAPTER 18

INTERNATIONAL TRADE AND THE DEVELOPING COUNTRIES

Learning Objectives:

■ Identify the various characteristics of developing countries.

■ Explain how greater openness to trade can potentially contribute to more rapid economic

growth.

I. Outline

Introduction

– Recovery in East Asia after Financial Crisis

An Overview of the Developing Countries

The Role of Trade in Fostering Economic Development

– The Static Effects of Trade on Economic Development

– The Dynamic Effects of Trade on Development

– Export Instability

– Potential Causes of Export Instability

– Long-Run Terms-of-Trade Deterioration

– Empirical Evidence on Trade and Development

Summary

II. Special Chapter Features

Titans of International Economics: Raul Prebisch (1901-1986) and Hans Wolfgang

Singer (1910-2006)

In the Real World: Managing Price Instability

III. Purpose of Chapter

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The purpose of this chapter is to review the general links between international trade and

economic development and to summarize key problems that exist (or are alleged to exist) with

respect to developing countries and their trade sector. Possible causes and consequences of the

potential trade difficulties are examined. Policy options are considered that might help to obtain

a more favorable contribution of trade to development and to accelerate growth in the

emerging/developing countries (EDCs). The chapter concludes with a specific focus on the debt

problem of these countries. Some possible solutions to this debt problem also are suggested.

IV. Teaching Tips

A. U.S. college students often have little conception of the vast differences between their

own living standards and those in the EDCs. Table 1 provides data necessary to understand the

economic conditions in developing nations. Anything you can do to supplement and to bring life

to these data would be very helpful.

B. Presentation of a numerical example can help the students in understanding how transfer

pricing can work against the host developing country.

V. Answers to End-of-Chapter Questions and Problems

1. According to trade theory, countries should specialize in and export those goods and

services that use relatively-intensively their relatively-abundant factor. Because the EDCs are

2. This question is obviously focusing on the dynamic gains from trade that are discussed

early in the chapter. The dynamic effects of trade are related to such phenomena as

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3. These arguments focus on the static effects of international trade discussed in the first

question. Following the dictates of comparative advantage, many developing countries could

find themselves specializing in labor/land-intensive production rather than more capital-intensive

production. Such a situation could lead to several problems. First, labor/land-intensive products

4. Basic reasons why export price (and earnings) instability is judged to be a problem are

indicated in the chapter. Price instability seems more likely to occur for EDCs than for ICs

5. The long-run deterioration of the commodity terms of trade suggests that, other things

equal, welfare is less for the EDCs than would otherwise be the case; for the ICs, it is greater, so

6. The diversification could mean that the price instability would be less because demand

and supply curves for manufactured goods are generally more elastic than for primary products.

Also, the diversification by definition would mean less of an “eggs in one basket” phenomenon.

7. If the larger market size generated by an economic integration project permits scale

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economies and efficient production, the EDCs might consequently diversify by exporting to each

other (or even to the outside world). There could also be other dynamic effects such as the

attraction of direct foreign investment from the ICs. Further, if the same primary products are

8. A reduction in the debt burden can make for greater stability and growth in the world as a

whole, and it is in the interests of both the developed countries and the emerging/developing

9. The developing countries are not blameless, because they have often pursued

inappropriate domestic policies involving price distortions, rapid inflation (leading to capital

flight), usage of loans for purposes other than development, etc. Since internal factors have been

VI. Sample Exam Questions

1. Remembering the optimum tariff analysis of Chapter 15, explain why it might be possible

that the imposition of a tariff by an EDC to improve its terms of trade (and thus hopefully to be

2. Utilizing material in this chapter as well as the trade theory developed in Chapters 6-8

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3. What actions or initiatives by international institutions have been undertaken to ease the

debt burden of emerging/developing countries?

5. Utilizing material in this chapter as well as arguments for protection in Chapter 15,

develop a case that the emerging/developing countries should pursue an “inward–looking” rather

than an “outward–looking” strategy. Are you really convinced by the case that you have built?

Why or why not?

7. Despite the general agreement among economists on the benefits of moving to free trade,

observers have noted that some developing countries may have “special” problems with regard