Page 7 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Pavitar Parkash Singh, Lovely Professional University Unit 1 : Trade as an Engine of Growth

Unit 1 : Trade as an Engine of Growth Notes

CONTENTS
Objectives
Introduction
1.1 A Brief Historical Sketch
1.2 Classical Period : International Trade and Growth
1.3 Post Classical Period : International Trade and Growth
1.4 Models of Endogenous Growth and International Trade
1.5 Summary
1.6 Key-Words
1.7 Review Questions
1.8 Further Readings

Objectives

After reading this Unit students will be able to:
• Describe the Classical and Post Classical Period of International Growth and Trade.
• Explain the Models of Endogenous Growth and International Trade.
Introduction

The promotion of free trade is one of the oldest policy implications offered by international economic
theory. While significant disconnects have historically existed between the politics and the economics
of trade policy, the rapid economic growth experienced by the export-oriented Asian countries during
the 1960s and 1970s amidst a largely stagnating and trade-restrictive developing world provided a
precedent for effective development policy, especially within the world's less developed countries
(LDCs). Free trade arguments have since been championed by a majority of global institutions,
including the International Monetary Fund (IMF hereafter), the International Bank for Reconstruction
and Development (IBRD) or World Bank, the Organization for Economic Co-operation and
Development (OECD hereafter), and the World Trade Organization (WTO hereafter). The argument
goes that a reduction in trade barriers will induce greater economic efficiency within LDCs by offering
cheaper world prices to domestic consumers (increasing consumer welfare) while creating conditions
of competition for domestic producers (forcing domestic production to shift towards the most efficient
sectors based upon availability of domestic factors).
1.1 A Brief Historical Sketch

It can be said that the positive effects of International Trade (IT) on Economic Growth (EG) were first
pointed out by Smith (1776). This idea prevailed until World War II (WWII), although with relative
hibernation during the ‘marginalist revolution’. After WWII, the introverted and protectionist EG
experiments had some significance, especially in Latin America. From the 60’s on, owing to the failure
of those experiments and to the association of quick EG with the opening of IT and the consequent
international specialization in several countries, as well as to the results of many studies based on the
neoclassical theories of EG and IT, a new decisive role was given to IT as EG’s driving force.
However, although the dominant theoretical position tended, from the beginning (with the Classics),
to indicate a positive relation between IT and EG, many studies linked the gains of IT only with static
effects. But Baldwin (1984), for example, concluded, in a survey of empirical studies, that the static
effects were of little significance. The debate has widened in the last decades, precisely in the direction

LOVELY PROFESSIONAL UNIVERSITY 1