Page 73 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 5 : Role of Dynamic Factors : Tastes, Technology and Factors Endowments in Trade

(iii) If a nation’s technology remains unchanged but its supply of labor grows proportionately Notes
more than its supply of capital, then the nation’s production possibilities curve shifts outward
(a) evenly along its entire length,
(b) more along the axis measuring the L-intensive commodity,
(c) more along the axis measuring the K-intensive commodity,
(d) any of the above is possible.
(iv) If a nation’s supply of labor increases but its supply of capital and technology remains
unchanged, then the nation’s production possibilities curve shifts outward
(a) only along the axis measuring the L-intensive commodity,
(b) mostly along the axis measuring the L-intensive commodity but also a little along the
axis measuring the K-intensive commodity,
(c) mostly along the axis measuring the K-intensive commodity,
(d) any of the above is possible.
(v) According to the Rybczynski theorem, the growth of only one factor, at constant relative
commodity prices, leads to an absolute expansion in the output of
(a) both commodities,
(b) the commodity using the growing factor intensively,
(c) the commodity using the non growing factor intensively,
(d) any of the above.
5.7 Summary

• If technology remains the same but the factors of production available to a nation increase, the
nation’s production possibilities curve shifts outward. This shift is uniform or symmetrical (so
that the new production possibilities curve has the same shape as the old one) if labor and
capital grow in the same proportion.
• Technical progress increases the productivity of a nation’s factors of production and has the
same general effect on the nation’s productions possibilities curve as an increase in the supply
of its factors.
• With unchanged tastes, this causes a change in the terms of trade, in the volume of trade and in
the distribution of the gains from trade between the two nations. The actual result depends on
the type and degree of the changes occurring.
• A nation’s offer curve also shifts if the nation’s supply of factors and technology remain unchanged
but its tastes change. Thus, a change in tastes also alters the volume of trade and the nation’s
terms of trade.
• 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.
5.8 Key-Words

1. Balanced growth : Equal rates of factor growth and technical progress in the
production of both commodities.
2. Engine of growth : The driving force behind economic growth. In the nineteenth
century, for example, exports were the leading sector that
propelled the economies of the regions of recent settlement into
rapid growth and development.
3. Exportable commodity : A commodity (such as aircrafts in the U.S.) that a nation produced
for domestic use and for export.

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