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Unit 1 : Trade as an Engine of Growth

intensity of IT and on the capacity for internal technological adaptation, which is made possible Notes
through higher levels of human capital, as suggested, for example, by Lucas (1988) and Romer
(1990).
1.6 Key-Words

1. Neoclassical theory : An economic theory that outlines how a steady economic growth
rate will be accomplished with the proper amounts of the three
driving forces: labor, capital and technology. The theory states that
by varying the amounts of labor and capital in the production
function, an equilibrium state can be accomplished. When a new
technology becomes available, the labor and capital need to be
adjusted to maintain growth equilibrium.
2. Endogenous growth theory : This theory holds that economic growth is primarily the result of
endogenous and not external forces. Endogenous growth theory
holds that investment in human capital, innovation, and
knowledge are significant contributors to economic growth. The
theory also focuses on positive externalities and spillover effects
of a knowledge-based economy which will lead to economic
development. The endogenous growth theory also holds that policy
measures can have an impact on the long-run growth rate of an
economy. For example, subsidies for research and development
or education increase the growth rate in some endogenous growth
models by increasing the incentive for innovation.
1.7 Review Questions

1. Explain trade as an Engine of growth.
2. What do you mean by Post classical period? Discuss international growth and trade in context of
post classical period.
3. What are the models of endogenous growth and international growth? Discuss.
Answers: Self-Assessment
1. (i)(a) (ii)(a) (iii)(c) (iv)(b)

1.8 Further Readings

1. Abramowitz, M. (1956), Resource and output trends in the United States since
1870, American Economic Review, 46(2), May, pp. 5-23.
2. Aghion, P. and Howitt, P. (1992), A model of growth through creative destruction,
Econometrica, vol. 60, no 2, pp. 323-351.
3. Backhouse, Roger E. (1985) — A History of Modern Economic Analysis— Oxford :
Basil Blackwell.
4. Balassa, B. (1963), An empirical demonstration of classical comparative cost
theory, Review of Economics and Statistics, vol. 45, pp. 231-238.
5. Balassa, B. (1978), Exports and economic growth : further evidence, Journal of
Development Economics, vol. 5, no 2, pp. 181-189.
6. Balassa, B. (1986), Policy responses to exogenous shocks in developing countries,
American Economic Review, Vol. 76, no 2, May, pp. 75-78.

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