Chapter 5 - International trade and economic growth. After completing this chapter, students will be able to: Extend the analysis of trade beyond the traditional static models of international trade and analyze the relationship between international trade and economic growth; show how the power of compounding makes international trade’s effect on economic growth much more important for human welfare than the static gains in welfare; familiarize students with the recent statistical evidence on the relationship between trade and economic growth;. | International Trade and Economic Growth The international trading enhanced competition and nurtured what Joseph Schumpeter a number of decades ago called “creative destruction,” the continuous scrapping of old technologies to make way for the new. (Alan Greenspan, 2001) The Goals of this Chapter Extend the analysis of trade beyond the traditional static models of international trade and analyze the relationship between international trade and economic growth. Show how the power of compounding makes international trade’s effect on economic growth much more important for human welfare than the static gains in welfare. Familiarize students with the recent statistical evidence on the relationship between trade and economic growth. Introduce the Solow growth model and use it show how international trade affects economic growth when investment is subject to diminishing returns and depreciation. Explain the Schumpeterian model of technological progress and use it to show how international trade affects the determinants of long-run technological progress. Trade and Growth Achieve Similar Gains in Welfare Trade and growth both enable the economy to reach a higher indifference curve. Trade leads to a new consumption point at C. Growth leads to a new consumption point at D. Both points lie on the same higher indifference curve. An economy with the red production possibilities frontier can reach the indifference curve I2 with trade. However, it takes continued growth (a large shift in the indifference curve) to reach the much higher level of welfare given by I20. Can trade help stimulate such economic growth? The Power of Compounding If per capita real GDP (PCGDP) grows at an annual rate of R, then after T years PCGDP will be: PCGDPT = PCGDPt=0(1 + R)T (5-1) The Power of Compounding For a country with a per capita real GDP of $2,000, a percent annual growth rate implies that in 10 years per capita real GDP will grow to: PCGDPt=10 = $2000(1 + .025)10 = $2,560 | International Trade and Economic Growth The international trading enhanced competition and nurtured what Joseph Schumpeter a number of decades ago called “creative destruction,” the continuous scrapping of old technologies to make way for the new. (Alan Greenspan, 2001) The Goals of this Chapter Extend the analysis of trade beyond the traditional static models of international trade and analyze the relationship between international trade and economic growth. Show how the power of compounding makes international trade’s effect on economic growth much more important for human welfare than the static gains in welfare. Familiarize students with the recent statistical evidence on the relationship between trade and economic growth. Introduce the Solow growth model and use it show how international trade affects economic growth when investment is subject to diminishing returns and depreciation. Explain the Schumpeterian model of technological progress and use it to show how .
