Page 70 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes intensely and is willing to offer less of its cloth than before for each quantity of wheat imported.
Thus, with offer curve U.K.’ the U.K. exchanges only 20C for 40W at the new equilibrium point J’ and
the terms of trade of the U.K. improve to P ’ = 2 (from P = 1). This improvement in the terms of trade,
G B
by itself, tends to improve the welfare of the U.K. The reduction of specialization in production and
in the volume of trade, by itself, tends to reduce the welfare of the U.K. (from the previous trade
position before the change in tastes).

W
U.K.
P n
P E
G
60
U.S.
U.K.
50
40
J
30

20
Z
10

0 10 20 30 40 50 60 C

Figure 5.3

Whether on balance the welfare of the U.K. improves or not depends on the relative strength of these
two opposing forces. However, we can no longer use commodity indifference curves to answer this
question because when tastes change in the U.K., the entire indifference map of the U.K. changes and
indifference curves cross.
If, on the other hand, the U.K.’s tastes shift from cloth to wheat, the U.K. offer curve will
rotate clockwise and result in a greater volume of trade but reduced terms of trade for the U.K. For
the effect of changes in U.S. tastes, separately and at the same time as changes in the U.K.’s tastes
occur.
5.5 Dynamic Factors, Trade and Development

With the exception of a handful of nations in North America and is Western Europe and Japan, most
nations of the world are classified as less developed countries (LDCs) or, to put it more positively, as
developing countries. LDCs presently account for less one-fourth of world trade. Aside from a small
group of newly industrializing economies (NIEs) (especially South Korea, Singapore, Taiwan and Hong
Kong) which are growing very rapidly based on the export of manufactured goods, most of the trade
of other LDCs involves the export of raw materials, fuels, minerals and some food products to the
industrialized, rich and developed countries (DCs), mostly in exchange for manufactured goods.
LDCs complain that because of this trade pattern, because their internal conditions differ widely
from those in DCs and because of the way in which the present international monetary system operates,
most of the benefit of their own growth accrues to DCs, primarily in the form of secularly improving
terms of trade. Thus, trade can no longer serve as an engine of growth for today’s developing countries
as it did for the regions of recent settlement (the U.S., Canada, Argentina, Uruguay, Australia, New
Zealand, and South Africa) during the nineteenth century.
LDCs advocate a new international economic order (NIEO), which involves higher prices for their
traditional exports, schemes to stabilize their export proceeds, increased foreign aid, preferential

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