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Figure 12.1 Nonfuel Primary Commodity Prices, Nominal and Real , by Commodity Group, 1960-2005 (2000 index = 100) (continued)

Figure 12.1 Nonfuel Primary Commodity Prices, Nominal and Real , by Commodity Group, 1960-2005 (2000 index = 100) (continued)

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Five Basic Questions about
Trade and Development
• How does international trade affect economic growth?
• How does trade alter the distribution of income?
• How can trade promote development?
• Can LDCs determine how much they trade?
• Is an outward-looking or an inward-looking trade policy
best?

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The Importance of Exports to
Different Developing Nations
• Importance of exports to developing nations
• Exports of LDCs are much less diversified than those of
developed countries

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Table 12.1 Merchandise Exports in
Perspective: Selected Countries, 2005

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Demand Elasticities and Export
Earning Instability
• Low income elasticity of demand for primary products
• Low price elasticity of demand and supply
• Export earnings instability

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The Terms of Trade and the
Prebisch-Singer Thesis
• Total export earnings depend on:
– Total volume of exports sold AND
– Price paid for exports

• Prebisch and Singer argue that export prices fall
over time, so LDCs lose revenue unless they can
continually increase export volumes
• Prebisch and Singer think LDCs need to avoid a
dependence on primary exports
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The Traditional Theory of
International Trade
• Comparative advantage
– specialization

• Relative factor endowments and international
specialization: the Neoclassical model
– Ricardo and Mill (static model)
– Heckscher and Ohlin (factor endowment theory)
• Different products require productive factors in different ratios
• Countries have different endowments of factors of production

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Figure 12.2 Trade with Variable Factor
Proportions and Different Factor
Endowments

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Figure 12.2 Trade with Variable Factor
Proportions and Different Factor
Endowments (continued)

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The Traditional Theory of
International Trade
• Main conclusion of the neoclassical model is that
all countries gain from trade
• World output increases with trade
• Countries will tend to specialize in products that
use their abundant resources intensively
• International wage rates and capital costs will
gradually tend toward equalization
• Returns to owners of abundant resources will rise
relatively
• Trade will stimulate economic growth
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The Traditional Theory of
International Trade
• Trade theory and Development: The Traditional
Arguments
– Trade stimulates economic growth
– Trade promotes international and domestic equality
– Trade promotes and rewards sectors of comparative
advantage
– International prices and costs of production determine
trading volumes
– Outward-looking international policy is superior to
isolation
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The Critique of Traditional Free-Trade
Theory in the Context of DevelopingCountry Experience
• The following assumptions of the Neoclassical model must
be scrutinized:

– Fixed resources, full employment, and
international factor immobility
– Fixed, freely available technology and
consumer sovereignty
– Internal factor mobility and perfect competition
– Governmental non-interference in trade
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