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Economic Growth in a More Integrated World

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.

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Economic Growth in a More Integrated World

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  1. Economic Growth in a More Integrated World • What is economic growth? • Sources of economic growth • Factor movement • Labor Movements • Capital Movements • Multinational Corporations

  2. 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

  3. 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

  4. The World Bank’s Classification of the Nation States$GDP PER CAPITA BY COUNTRY GROUP2000 • Low Income 426 • Lower Middle 1,146 • Upper Middle 4,900 • High Income 27,609 • Middle East and N.Afc 2,235

  5. Source: The World Bank

  6. Source: World Bank

  7. 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

  8. Balanced Growth: More Inputs • Balanced growth: Proportional increases in labor and capital Food C1 U1 Co P1 Uo Po Cloth o

  9. 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

  10. 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

  11. Growth and Terms of Trade (Immiserizing Growth) F Uo U2 TT: (Pc/Pf) U1 TT’: (Pc/Pf)’ P2 (Pc/Pf) > (Pc/Pf)’ P1 Po TT’ TT TT C o

  12. 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 o C

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

  14. A Simple Model Wa Wb S S’ Tax wao Wb1 Wb1 wbo D:VMPLb D’: VMPLa(1-t) D:VMPLa Ob Oa Total Labor

  15. A Simple Model rb ra S S’ rao rb1 ra1 rbo D:VMPKb D:VMPKa Ob Oa Total Capital

  16. 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

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