Economic Growth in a More Integrated World

What is economic growth?

Sources of economic growth
Factor movement
Labor Movements
Capital Movements
Multinational Corporations

Economic Growth
Economic growth refers to an increase in the
real output of the economy: An outward shift of
the production possibilities frontier
Sources of economic growth:
Increases in the quantities of resources
Technological progress

Exogenous and endogenous sources of growth

The income effect of economic growth

Trade and Economic Growth

Does (international) trade contribute to
economic growth?
Economic growth and terms of trade
The challenges developing countries face in
increasingly globalized economy

Inadequate savings/investments
Rapid population growth and relatively small labor force
Deteriorating terms of trade
Weak institutions (economic, political, social)
And AIDS

The World Banks Classification of the Nation States

$GDP PER CAPITA BY COUNTRY GROUP

2000

Low Income
Lower Middle
Upper Middle
High Income
Middle East and N.Afc

426
1,146
4,900
27,609
2,235

World's Household Consumption Pie-1999

4%

18%

78%

Low Inc
Mid Inc
High Inc

Source: The World Bank

$GDP and Consumption Per Capita-1999

30000

25000

20000
GDP-PC

15000

Cons-PC

10000

5000

0
Low Inc

Mid Inc

High Inc

Source: The World Bank

Capital Stock & Labor Distribution

100
90
80
70
60
CapStock

50

Labor

40
30
20
10
0
LowInc

Source: World Bank

LowerMid

UpperMid

High

The structural differences:

Labor:
Labor force participation
Female labor force participation
Skilled and semiskilled labor
Capital:
Physical capital
Human capital
Infrastructure
Physical infrastructure
Institutional infrastructure
Social/Cultural infrastructure
Capital Stock and Labor Productivity

Balanced Growth: More Inputs

Balanced growth: Proportional increases in
labor and capital
Food

C1 U1
Co
P1
Uo
Po

Cloth

Will balanced growth necessarily

increase welfare?
Population increase vs. labor force increase
The effect of growth on terms of trade
The small country case
The large country case
When a number of small countries exporting
the same product grow simultaneously

Growth Effects

Income Effect
Price or Terms-of-trade effect
Effects on trading partner
Trade effect
Production effects
In the case resource growth
In the case technological progress

Growth and Terms of Trade

F

U2

(Immiserizing Growth)

Uo

TT: (Pc/Pf)

U1

TT: (Pc/Pf)
P2

(Pc/Pf) > (Pc/Pf)

P1
Po

TT
TT

TT
C

Growth and Terms of Trade

F

U2

TT: Pc/Pf
TT: (Pc/Pf)
(Pc/Pf) > (Pc/Pf)

U1
Uo

P2

P1
Po

TT
TT

TT
C

Factor Mobility
Recall factor price equalization theorem
Labor mobility: migration/immigration
Capital mobility:
Portfolio investments
Direct investments
Multinational corporations
Horizontal MNEs
Vertical MNEs
Conglomerates

A Simple Model
Wa

Wb
S

Tax

wao
Wb1

Wb1
wbo
D:VMPLb

D:VMPLa(1-t)

D:VMPLa

Ob

Oa
Total Labor

A Simple Model
ra

rb

rao
rb1

ra1

rbo
D:VMPKb

D:VMPKa

Ob

Oa
Total Capital

Multinational Enterprises
An MNE is a firm that owns, controls and
manages production or service facilities in two
or more countries
Horizontally integrated MNEs
Vertically integrated MNEs
Conglomerates

Capital arbitrage
The location theory
Bypassing trade barriers: R&Ds and FDIs
Are MNEs substitutes or complements to trade?
Do MNEs facilitate transfer of technology?
Do MNEs exploit and abuse their host countries?

MNEs and Economic Development

Saving, investment and economic growth