This is an extract of our International Trade And Development Strategy document, which we sell as part of our Economic Development Notes collection written by the top tier of University Of Birmingham students.
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Lecture 7 - International Trade and Development Strategy Developing countries depend primarily on exports of primary products, but developed countries restrict imports of these products, whilst technology creates synthetic substitutes.
* Natural resources and agricultural goods. Petroleum and petroleum products are 95% of all Nigeria exports.
* Demand varies little with income but prices vary a lot with demand. Globalisation is a process by which economies of the word become increasingly integrated, and it is also the way in which people consume similar goods and services across different countries which facilitate economic integration and promote it. Can be bad for developing countries that can be locked into a pattern of dependence. There is a classical and neoclassical theory of trade, both of which are based on the concept of comparative advantage (when a country. Individual or company produces a good at a lower opportunity cost than another). Classical trade theory says this is due to different labour productivity in different sectors. Neoclassical trade theory says this is due to different endowments of factors of production. NEOCLASSICAL TRADE THEORY Capital-abundant countries should specialise in producing capital-intensive goods and labour abundant countries in labour-intensive goods. Classical suggests countries should specialise in the goods they have comparative advantage in. according to neoclassical theories of trade:
- Trade is good for growth through its positive impact on output and access to resources.
- Trade good for between and within country equality: equalisation of factor prices across countries, increase of wages in labour-intensive countries.
- No role for the state: its factor or technology endowment that matters, then free trade will do the rest. This theory also has some crucial assumptions firstly productive resources are fixed in quantity and quality and there is full employment. Technology is fixed, perfect mobility of productive resources, perfect competition and no risk or uncertainty. Govs play no role in international economic relations and benefits from trade accrue to everyone within the country. This theory has been criticised.
* Factor endowments are not fixed but influenced by trade and policy both of which exacerbate comparative advantage in unskilled activities and prevent the growth of capital and entrepreneurship.
* Power is held by developed countries and MNCs - price setting, appropriation of profits.
* Specialising in primary products' exports is risky. Therefore trade based solely on comparative advantage perpetuates and worsens inequality and underdevelopment. Trade policy and the Role of Governments Discounted by neoclassical trade theory. Govs can support specific industries and manipulate prices and trade positions relative to other countries. When restrictive policies are employed by developed countries to deal with inflation and unemployment these can have severe negative effects on the economies of poor countries. Several tools can be used: TARIFF - fixed % tax on the value of an imported good. QUOTA - physical limitation on the quantity of any item that can be imported. SUBSIDY - payment by the gov to producers of a particular industry. EXCHANGE RATE - price of an imported good relative to domestic goods which influenced the incentive to produce and consume tradable and non-tradable goods. OUTWARD ORIENTED TRADE STRATEGIES Encourage free-trade and the free movement of capital, workers, enterprises and students. Strategy is increased export incentives through exchange rate depreciation and targeted subsidies. Rationale: replace small internal market for large world market, remove distortions from protection, and follow success stories on East Asian countries. INWARD ORIENTED TRADE STRATEGIES Stress the need for LDCs to evolve their own styles of development so policies that encourage "learning by doing" in manufacturing and thee development of technologies appropriate to a country's resource endowments. Greater self-reliance can be achieved. Discouragement of imports and foreign investment.
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