International Economics Developed by Suman Kalyan Chakraborty NAAC ACCREDITED A+ DDCE Education for all DIRECTORATE OF DISTANCE AND CONTINUING EDUCATION Utkal University, Bhubaneswar - 7, Odisha E-mail: [email protected] Website: www.ddceutakal.ac.in © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical photocopying, recording and/or otherwise without the prior written permission of the author and the publisher. Name of Study Material: International Economics ISBN: ................................................................. Author Name’s: Suman Kalyan Chakraborty Year of Print: ............................................ Printed and Published by: Mrs. Meena Pandey Himalaya Publishing House Pvt. Ltd., "Ramdoot", Dr. Bhalerao Marg, Girgaon, Mumbai-400 004. Phones: 23860170 & 23863863, Fax: 022-23877178 Email: [email protected]; Website: www.himpub.com For: Directorate of Distance and Continuing Education Utkal University, Vani Vihar, Bhubaneswar - 751 007. www.ddceutkal.ac.in DIRECTORATE OF DISTANCE AND CONTINUING EDUCATION UTKAL UNIVERSITY : VANI VIHAR BHUBANESWAR – 751 007 From the Director’s Desk The Directorate of Distance & Continuing Education, originally established as the University Evening College way back in 1962 has travelled a long way in the last 52 years. ‘EDUCATION FOR ALL’ is our motto. Increasingly the Open and Distance Learning institutions are aspiring to provide education for anyone, anytime and anywhere. DDCE, Utkal University has been constantly striving to rise up to the challenges of Open Distance Learning system. Nearly one lakh students have passed through the portals of this great temple of learning. 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We are sure, that you will be able to chalk out a well planned programme to study the courseware. By choosing to pursue a course in distance mode, you have made a commitment for self improvement and acquiring higher educational qualification. You should rise up to your commitment. Every student must go beyond the standard books and self instructional course material. You should read number of books and use ICT learning resources like the internet, television and radio programmes etc. As only limited number of classes will be held, a student should come to the personal contact programme well prepared. The PCP should be used for clarification of doubt and counseling. This can only happen if you read the course material before PCP. You can always mail your feedback on the course ware to us. It is very important that one should discuss the contents of the course materials with other fellow learners. We wish you happy reading. DIRECTOR SYLLABUS International Economics Unit – I 1. Economic Growth and International Trade: Growth and Trade when growth is unspecified, formal model of economic growth and international trade, increases in factor endowments and international trade, technical progress and international trade, economic growth, International trade and inter movement of factors; a dynamic analysis of pattern of specialization and factor accumulation.. Unit – II 2. Economic expansion and the terms of trade; The British School Premises hypothesis. 3. Intermediate products and international trade; implications of interindustry flows and pure intermediate products. Unit – III 4. International Trade and factor market distribution with wage differential with factor immobility and factor price rigidity. Unit – IV 5. International Trade with product market imperfections, the theory of monopoly in general equilibrium. Unit – V 6. International Trade with nontraded goods. CONTENTS UNIT – I Lesson 1: INTRODUCTION ...............................................................................................................................1 – 47 1.1 Economic Growth and International Trade 1.2 Growth and Trade when Growth is Unspecified 1.3 Formal Model of Economic Growth and International Trade 1.4 Increases in Factor Endowments and International Trade 1.5 Technical Progress and International Trade 1.6 Economic Growth, International Trade and Inter Movement of Factors 1.7 A Dynamic Analysis of Pattern of Specialization and Factor Accumulation 1.8 Summary 1.9 Self Assessment Questions UNIT – II Lesson 2: ADVANCED TOPICS OF INTERNATIONAL ECONOMICS...................................................48 – 96 2.1 Economic expansion and the terms of trade 2.2 The British School Premises hypothesis/English school of international relations theory 2.3 Summary 2.4 Self Assessment Questions Lesson 3: INTERMEDIATE PRODUCTS AND INTERNATIONAL TRADE; IMPLICATIONS OF INTER—INDUSTRY FLOWS AND PURE INTERMEDIATE PRODUCTS.................................................................................................... 97 – 122 3.1 Intermediate products and international trade 3.2 Summary 3.3 Self Assessment Questions UNIT – III Lesson 4: INTERNATIONAL TRADE AND FACTOR MARKET DISTRIBUTION WITH WAGE DIFFERENTIAL WITH FACTOR IMMOBILITY AND FACTOR PRICE-RIGIDITY.......................................................................................................123 – 135 4.1 Factor Pricing and Income Distribution 4.2 Factor Immobility (Labour Markets) 4.3 Summary 4.4 Self Assessment Questions UNIT – IV Lesson 5: INTERNATIONAL TRADE WITH PRODUCT MARKET IMPERFECTIONS, THE THEORY OF MONOPOLY IN GENERAL EQUILIBRIUM ........................................136 – 139 5.1 Trade Policies with Market Imperfections and Distortions 5.2 Summary 5.3 Self Assessment Questions UNIT – V Lesson 6: INTERNATIONAL TRADE WITH NON-TRADED GOODS ...............................................140 – 177 6.1 The Role of the Traded and Non-traded Sectors in Economic Growth 6.2 Summary 6.3 Self Assessment Questions UNIT – I Chapter 1 INTRODUCTION Objectives The objectives of this lesson are to: Economic Growth Growth and Trade when growth is unspecified Formal model of economic growth and International trade Increases in factor endowments and international trade Technical progress and international trade Economic growth,International trade and inter movement of factors A dynamic analysis of pattern of specialization and factor accumulation Structure: 1.1 Economic Growth and International Trade 1.2 Growth and Trade when Growth is Unspecified 1.3 Formal Model of Economic Growth and International Trade 1.4 Increases in Factor Endowments and International Trade 1.5 Technical Progress and International Trade 1.6 Economic Growth, International Trade and Inter Movement of Factors 1.7 A Dynamic Analysis of Pattern of Specialization and Factor Accumulation 1.8 Summary 1.9 Self Assessment Questions 1.1 ECONOMIC GROWTH AND INTERNATIONAL TRADE Economic Growth Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is usually calculated in real terms - i.e., inflation-adjusted terms – to eliminate the distorting effect of inflation on the price of goods produced. Measurement of economic growth uses national income accounting. Since economic growth is measured as the annual percent 2 International Economics Notes change of gross domestic product (GDP), it has all the advantages and drawbacks of that measure. The economic growth rates of nations is commonly compared using the ratio of the GDP to population or per-capita income. The "rate of economic growth" refers to the geometric annual rate of growth in GDP between the first and the last year over a period of time. Implicitly, this growth rate is the trend in the average level of GDP over the period, which implicitly ignores the fluctuations in the GDP around this trend. An increase in economic growth caused by more efficient use of inputs (such as labor productivity, physical capital, energy or materials) is referred to as intensive growth. GDP growth caused only by increases in the amount of inputs available for use (increased population, new territory) is called extensive growth. Development of new goods and services also creates economic growth. Measuring economic growth The economic growth rate is calculated from data on GDP estimated by countries´statistical agencies. The rate of growth of GDP/capita is calculated from data on GDP and people for the initial and final periods included in the analysis of the analyst. Determinants of per capita GDP growth In national income accounting, per capita output can be calculated using the following factors: output per unit of labour input (labour productivity),