International Economics
Prof. D. Sunitha Raju
Economic Trade & Growth
International Economics
Economic Growth & Trade
1. What is Economic Growth Outward shift in the Production Possibility
Frontier
2. Sources of Growth Increase in the quantities of resources Technical progress Factor Mobility
International Economics
Economic Growth & Trade
1. Growth of Factors of Production (more inputs)
a) More labour and capital : Balanced growth
b) More labour or more capital : Unbalanced growth
Causes outward shifts in production frontier
International Economics
Balanced Growth in Labor and Capital
20
40
6070
140
050 14
0130
260 280 X
Y
AB
B’·
·
·
International Economics
Balanced Growth & Welfare
(a) Income effect : Growth’s effect on per capita consumption
(b) Terms of Trade : Changes in relative output prices
International Economics
How Does Balanced Growth Affect Welfare?Small-Country Case Large-Country Case
Effect on growing economy
Income effect 0 if population ↑
+ if labor-force ↑
if population ↑
+ if labor-force ↑
Terms-of-trade-effect 0 -if export-expanding
+ if import-replacing
Change in export price 0 ↓
Change in import price 0 ↑
Net effect on per-capita consumption
0 if population ↑
+ if labor-force ↑
Depends on magnitudes of income and terms-of-trade effects
Effect on trading partner:
Income effect 0 0
Terms-of-trade effect 0 +
Change in export price 0 ↑
Change in import price 0 ↓
Net effect on per-capita consumption
0 +
International Economics
Growth in only Labor or Capital
X
Y
A
B
130
8070
140 150 2750
·
·
International Economics
Labor Growth & Welfare
Small-Country Case Large-Country Case
Effect on growing economy
Income effect -if population ;
+ if labor-force
if population ;
+ if labor-force
Terms-of-trade-effect 0 -if export-expanding
+ if import-replacing
Net effect on per-capita consumption
-if population ;
+ if labor-force
Depends on signs and magnitudes of income and terms-of-trade effects
Effect on trading partner
Income effect
Terms-of-trade effect
0
0
0
+ if export-expanding;
-if import-replacing
Net effect on per-capita consumption
0 + if export-expanding
-if import-replacing
International Economics
Capital Growth & Welfare
Small-Country Case Large-Country Case
Effect on growing economy
Income effect + +
Terms-of-trade-effect 0 -if export-expanding
+ if import-replacing
Net effect on per-capita consumption
+ Depends on signs and magnitudes of income and terms-of-trade effects
Effect on trading partner
Income effect
Terms-of-trade effect
0
0
0
+ if export-expanding;
-if import-replacing
Net effect on per-capita consumption
0 + if export-expanding
-if import-replacing
International Economics
Economic Growth : More Productivity
(a) Types of Technical Progress• Neutral technical progress• Capital saving technical progress• Labour saving technical progress
(b) Productivity and Welfare
International Economics
2. Technical Progress
• Causes the production frontier to shift outward
• Shift depends on the type and rate of technical progress
• Neutral technical progress leads to expansion of the production of all goods at the same rate
International Economics
Growth & Trade
• Growth in output of a country’s exportables & importables
• Shifts in Consumption pattern
• National income growth
Terms of Trade Implication
International Economics
Factor Mobility
a) Motives for Capital Flows
i. Portfolio Investment• To earn higher return• Risk diversification
ii. Direct Foreign Investment• Horizontal integration• Vertical integration• To avoid tariff or other restriction• To take advantage of subsidies
International Economics
Factor Mobility
b) Motives for Labour Mobility
i. Economic factors
• Higher wages
• Cost of moving
ii. Non economic factors
• Economic freedom
• Religions or [political freedom
International Economics
F
J
WA
OA OB
VMPAL
•
••
•
•
•
•
E
H
VMPBL
•
WB
•••
•
••
•
WB1
•WA1
WA0
WB0
G
L0 L1
Native labor in AMigration from B to A
What Are the Effects of Labor Mobility?
International Economics
Effects of Labour Migration from Country B to Country A
Effect on:
Capital owners in A +
Native labour in A -
Immigrants +
Net effect on A +(area EGL1L0)
Capital owners in B -
Labour remaining in B +
Net effect on B -(area EGL1L0)
Net effect on world +(area EGJ)
International Economics
Immigration to the United States by Top Source Countries, Fiscal Year 2002
Country Immigrants (Thousands)
Mexico 219.4
India 71.1
China 61.3
Philippines 51.3
Vietnam 33.6
Source: Data from U.S. Bureau of Citizenship and Immigration Services (at http://www.uscis.gov).
International Economics
Capital Mobility : Motives
i. Portfolio Investment• To earn higher return• Risk diversification
ii. Direct Foreign Investment• Horizontal integration• Vertical integration• To avoid tariff or other restriction• To take advantage of subsidies
International Economics
F
J
RA
OA OB
VMPAK
•
••
•
•
•
•
E
H
VMPBK
•
RB
•••
•
••
•RB
1
•RA1
RA0
RB0
G
K0 K1
What Are the Effects of Capital Mobility?
International Economics
Effects of Capital Flow from Country B to Country A
Effect on:
Owners of native capital in A _
Labourers in A +
Net effect on A +(area EGF)
Owners of capital remaining in B
+
Labourers in B _
Owners of migrant capital +
Net effect on B +(area FGJ)
Net effect on world welfare +(area EGJ)
International Economics
Selected indicators of FDI and International Production 1982-2006
Item Value at current prices
(Billions of dollars)
Annual growth rate
(Per cent)
1982 1990 2005 2006 1986-90 1991-95 1996-2000
FDI inflows 59 202 946 1,306 21.7 22.0 40.0
FDI outflows 28 230 837 1,216 24.6 17.3 36.4
Inward FDI stock 637 1,779 10,048 11,999 16.9 9.4 17.4
Outward FDI stock 627 1,815 10,579 12,474 17.7 10.6 17.3
Income on inward FDI 47 76 759 881 10.4 29.2 16.3
Income on outward FDI 46 120 845 972 18.7 17.4 11.8
Cross-border M&Asa _ 151 716 880 25.9b 24.0 51.5
Sales of foreign affiliates 2,741 6,126 21,394c 25,177c
19.3 8.8 8.4
Gross product of foreign affiliates 676 1,501 4,184d 4,862 17.0 6.7 7.3
Total assets of foreign affiliates 2,206 6,036 42,637e 51,187 17.7 13.7 F19.3
Exports of foreign affiliates 688 1,523 4,197f 4,707f 21.7 8.5 3.3
Employment of foreign affiliates (in thousands)
21,524 25,103 63,770g 72,627g
5.3 5.5 11.5
Source: UNCTAD, based on the FDI/TNC database (www.unctad.org/fdi stastics), UNCTAD GlobStat database, and IMF, 2007b
International Economics
FDI Inflows, Global and By Groups of Economies, 1980-2004
International Economics
Developing Countries: Total Resource Flows
International Economics
1999 2000 2001 2002 2003
Angola 2471 879 2146 1643 1415
South Africa 1502 888 6789 757 762
Egypt 1065 1235 510 647 NA
Nigeria 1005 930 1104 1281 1200
Morocco 850 NA 2825 481 2279
Tanzania 542 282 467 NA NA
Algeria 507 438 1196 NA NA
Sudan 371 392 574 713 1349
Top Recipients of FDI in Africa, 1999-2003(Million US$)
International Economics
FDI Inflows to African Fuel and Mineral-Exporting Countries Compared to Other Africa, 1970 and
2003
International Economics
U.S. Direct Investment Abroad Foreign Direct Investment in U.S.
Country Amount(Billions of Dollars)
Percentage Amount(Billions of
Dollars)
Percentage
Canada 18.3 13.1 100.8 8.1
Europe 76.9 55.2 890.6 71.9
Latin America 19.9 14.3 42.7 3.5
Africa 1.1 0.7 2.1 0.1
Middle East 1.9 1.4 8.4 0.7
Asia and Pacific
21.2 15.3 194.0 15.7
139.3 100.0 1238.6 100.0
Direct Investment Position of the United States, 2000
International Economics
1995 1996 1997 1998 1999 2000 2001 2002 2003
Angola FDI inflowsGreenfield FDI inflows
Profit remittances
472472386
181181536
412412559
11141114
378
24712471
653
879879929
21452126
927
167216721100
141514151700
Congo, Rep.
FDI inflowsGreenfield FDI inflows
Profit remittances
12564
326
7359
458
797999
3333
-77
538537181
166166466
7777
369
331331572
201201378
Egypt FDI inflowsGreenfield FDI inflows
Profit remittances
598588228
636465
34
891789113
10761028
134
1065327100
1235707
92
510-150
28
647312
89
237-1963
47
Morocco FDI inflowsGreenfield FDI inflows
Profit remittances
332332101
322282116
1188610160
417412143
137612531286
423423268
2808597401
481434482
2279655594
Total FDI, Greenfield FDI Inflows and Profit Remittances, Selected Countries, 1995-2003
(Million Dollars )
Contd.:-
International Economics
Nigeria FDI inflowsGreenfield FDI inflowsProfit remittances
1079
1079
1330
1593
1593
1598
1539
1539
1477
1051
1039
1427
1005
987162
1
930915183
2
1104
1103
802
12811281
984
120012001316
Sudan FDI inflowsGreenfield FDI inflowsProfit remittances
000
000
9898…
371371
…
392392
…
574574
…
713688633
1349531
386824941164
Tanzania, Utd. Rep.
FDI inflowsGreenfield FDI inflowsProfit remittances
120118
2
150133
2
158156
3
172149
8
517517
17
4634813
327207
1
240240
2
248246
2
Contd……
International Economics
Multinational Corporation
a) Demand Factors Overseas subsidiaries to tap foreign market
demand Market competition
b) Cost Factors Labor costs Transportation costs Government policies
International Economics Rank Company Home Nation Industry Yearly
Sales(billion $)
Percentage of Foreign Sales
1 Exxon Mobil Corporation United States Petroleum 206.1 69.4
2 General Motors United States Motor vehicles 184.4 26.1
3 Ford Motor Company United States Motor vehicles 170.1 30.4
4 Daimler Chrysler Germany/US Motor vehicles 152.4 32.0
5 Royal Dutch/Shell Group UK/Netherlands Petroleum 149.1 54.4
6 British Petroleum UK Petroleum 148.1 71.3
7 General Electric United States Electronics 129.9 38.1
8 Toyota Japan Motor vehicles 125.6 49.6
9 Chevron Texaco United States Petroleum 117.1 55.5
10 Total Fina Elf France Petroleum 105.8 78.0
11 IBM United States Computers 88.4 57.9
12 Volkswagen Group Germany Motor vehicles 79.6 72.6
The World’s Largest Industrial Multinational Corporations in 2000
Contd.:-
International Economics
13 Hitachi Japan Electronics 75.5 29.3
14 Siemens Germany Electronics 71.4 43.8
15 Matsushita Electric Japan Electronics 68.9 49.3
16 Sony Japan Electronics 63.7 67.2
17 Honda Motor Japan Motor vehicles 57.5 72.9
18 Fiat Italy Motor vehicles 53.6 66.9
19 Petroleos de Venezuela
Venezuela Petroleum 53.2 93.5
Contd…
International Economics
Multinational Corporation
a) Direct Exporting vs FDI Foreign market size is large, FDI is profitable Foreign market size is small, direct export is
profitable
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