International Trade and Economic Development

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INDIAN INSTITUTE OF TECHNOLOGY, KHARAGPUR

International Trade and Economic Development

Swapnil S. Bagmar
06HS2004

Development Economics term paper (Spring 2007-08)

International trade

International trade is the exchange of goods and services across international boundaries or territories. In most countries, it represents a significant share of GDP. While international trade has been present throughout much of history, its economic, social, and political importance has been on the rise in recent centuries. In this paper we will not go into the theories governing international trade but the focus will be more on its implications on economic development.

Consider the following data:

Sources: World Development Report

EconomiesTrade per
capita
(US$, 2004-2006)Trade to
GDP
ratio (2004-2006)Share in
world
total exportsShare in
world
total imports
High income economy: United States1086425.98.5915.46
Upper-middle-income economies: Mexico464362.72.072.16
Lower-middle-income economies: China1207698.026.38
Low-income economies: India30741.811.41
As evident from the above data, the volume of trade directly reflects a country’s per capita income. Likewise the share of the developed economies in world exports and imports is high. The imports consist mainly of raw materials which are the exports of the developing countries. The reason China is still a lower middle-income economy is due to its large population.

During the 1950s and 1960s, most developing nations, particularly the larger ones, strongly opted for a policy of import substitution industrialization (ISI). This was based on heavy protection and generally led to very inefficient industries. Since the early 1970s, an increasing number of developing countries deregulated their economies and liberalized trade, and this stimulated efficiency and growth. Some developing nations also tried strategic trade policies and to indigenize growth (as postulated by endogenous growth theory), but with only limited success. It seems impossible and inconsistent under the new international trade rules, however, for other developing countries to duplicate the East Asia "miracle," which was based on strong government support for domestic industry while stimulating competition and efficiency among domestic firms. The successful completion of the Uruguay Round is expected to greatly benefit developing countries through continued deregulation and increased access to developed-country markets

Characteristics of the international trade sector of developing countries and high income countries:
Low incomeMiddle incomeUpper middle incomeHigh income
Average annual growth rate of exports, 1980-19905.7%3.5%3.5%5.0%

Average annual growth rate of exports, 1990-19949.17.07.85.1 Average annual growth rate of imports, 1980-19901.61.02.26.1 Primary product exports as percentage of total exports, 199238514818 Manufactured goods exports as percentage of total exports, 199262495382 Primary product imports as percentage of total exports, 199227272625 Manufactured goods exports as percentage of total imports, 199274737476 International reserves in months of coverage of imports of goods and services, 19945.0 mo3.1 mo3.8 mo2.6 mo

Source: The World Bank, World Development Report, 1996

The above table portrays various elements of less developed country’s international trade sector. Some important observations can be made from this information: 1..The rate of export for all groups of LDCs increased in the 1990-1994 period compared to 1980-1990. 2.For the 1980-1990 period, the low growth rates of imports of developing countries importantly reflect the fact that some countries were compressing imports in an attempt to deal with their debt problems. 3.LDCs are generally...
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